After 7 seven years (in most cases), a debt will disappear from your credit report. If the debt has gone unpaid for 7 years, then it can no longer legally remain on your credit report. You can challenge this listing on your credit report and it will come off. Please note: the amount of time a late payment can appear on your credit report has nothing to do with the statute of limitations. Very important distinction. 
Even though a debt may no longer legally appear on your credit report after 7 years, you could still be sued for the debt because the statute of limitations for your debt in your state is not up. 

If the debt is gone from your credit report AND the statute of limitations is up on this debt, you're home free! If enough time has past for both the legal debts collection statutes of limitations and the credit report limitations has passed, don't worry about the debt! If your debt meets both of these conditions, it is un-collectable and it cannot appear on your credit report! If you get to this point, stop here, you are done!

My debts are not past the statute of limitations, and I need to settle them.

It is possible, but not guaranteed, of course, that the average consumer can settle a debt for about 75 cents on the dollar. You will be money ahead by doing this. However, your credit report may reflect the fact that you didn't pay as agreed, and future creditors will be more reluctant to grant you credit. We'll discuss ways to improve your chances of both settling your debts for less than what you owe and getting the negative information deleted from your credit report.

Understanding the True Risks and Realities of Overdue Debts

It is important to remember, however, that the creditor would be within his rights to get a garnishment and seize property, even for a small debt. There is a risk of financial reprisals when any debt goes unpaid.

In fact, very few creditors will push all the way to a garnishment on a relatively small unsecured debt for the simple reason is that creditors must obtain a judgment before doing this. Getting a judgment and subsequent garnishment and seizure are a creditor's most terrifying weapons in collecting past due debt, but they are expensive and time-consuming. Even if the creditor went all the way to recover the small debt, they probably wouldn't be able to recover enough to offset their collection costs. Therefore, there is very little risk of a creditor taking an unsecured debt farther than simple collections.

Many consumers fold under the perceived strain of unpaid debts. Hundreds of bankruptcies take place in the United States each week for amounts under $5,000. These consumers are so intimidated by their creditors that they flee to bankruptcy, even though bankruptcy can bring financial hardship if you don't do all the right things for the next ten years. If these same consumers had simply waited, ignoring the threatening letters and telephone calls, they would have realized that their creditors were all bark and no bite. Bankruptcy is the best option for some few consumers, but it is much overused. And, when a consumer files for bankruptcy, everyone loses -- especially the creditors.

The risks of judgments, garnishments, and property seizures must be properly balanced against the likelihood that such drastic collection measures will ever happen. The risk, and the decision to take that risk, are entirely yours if you're in such a position.

Debts Which are Good Candidates For Settlement

1. Most unsecured debts can be settled. An unsecured debt is a debt where there is no collateral. Unsecured debts include medical bills, credit cards, department store cards, personal loans, collection accounts, student loans, amounts remaining after foreclosure or repossession, and bounced checks. There are a few creditors who will never compromise, but most will take a less-than-full payment as settlement-in-full to close a troublesome account. (Utility companies, however, rarely settle for less than the full balance.)
2. Secured, collateralized debts (such as a home or automobile) are an entirely different story. If the creditor can simply repossess the property, why should he negotiate? You can often renegotiate a short payment relief with a secured debt but don't attempt to settle the account while you still possess the property.
3. Also, the creditor must have a good reason to want to settle. If the account is paid current and there is no recent history of late payment, it will be difficult to convince the creditor that it is in their best interest to settle. (This should not be read as a recommendation to stop paying bills that are current. If you stop paying your current bills, you will almost certainly make your credit situation worse.) Perhaps bad credit is not an issue for you at this point and you feel you must stop paying your bills in order to settle them and get back on top of your debt load. If this is the case, you make that decision at your own risk. In other words, don't do it.

Tactics For Getting the Upper Hand

1. Get your terms in writing before you even open your checkbook. Never expect a creditor to meet an agreement that was made verbally. Everything must be in writing and, even then, you will probably have to fight to make the creditor live up to his end of the bargain.

    

2. Keep good records. This can be the difference between a good and bad settlement. Don't expect them to remember you or what you agreed upon.
   • Send all correspondence via registered mail (about $2 a letter).
   • Keep a copy of every letter you send.
   • Include a self-addressed, stamped envelope with every letter. (Make it as easy as possible for them to contact you.)
   • If you call, keep a log of when you spoke to the agencies, and who. Ask for the name of the supervisor of the person you spoke to, as the turnover rate at collections agencies is high.
   • Follow up all phone correspondence with a letter (registered, of course).

    

3. Penalties and extra interest should be your first target in reducing the debt Maybe you don't have sufficient funds to repay a debt in full when a creditor demands payment. In many cases, much of the debt represents interest and penalties accrued while the consumer was unable to pay. It will be in the best interests of both parties to reach a reasonable arrangement for settlement. Most companies would be thrilled to get you to pay the original debt even without the extra penalties they add on and will usually be more agreeable to waive these fees.

    

4. Time is on your side. As time passes, the creditors will likely stop calling and the debt will be filed away for future attention. The longer the debt remains uncollected, the better your chances will be of getting a good settlement. Eventually, the creditor will consider the bad debt a loss in order to receive a corporate tax write-off. This does not necessarily mean that they won't pursue you for the debt. The corporation may then collect on the debt themselves, sell or assign the debt to a collection agency, press for a judgment and garnishment, or temporarily ignore the debt. The course of action chosen by the creditor will vary widely between corporations and debts.

   If you're contacted by more than one collection agency for the same debt, it means that the original creditor has hired a secondary or even tertiary collection agency. This indicates that the original creditor and even the first collection agency has given up on you. A collection agency that agrees to take your debt at this time will insist the original creditor pay a generous fee (usually 50%-60% of what is owed). Many secondary and tertiary agencies will take 33-55 cents on the dollar. If the agency hasn't been able to reach you by phone but knows that you are receiving its letters, it may be willing to take even less.

    

5. Never look too eager to settle. Take plenty of time to reach an agreement. Don't accept the first, or even second, settlement offer. Make sure that they are the ones calling you to push the deal forward. You cannot expect to reach an affordable settlement if the creditor thinks he has the upper hand. If, for example, you tell a creditor that you really need to get this debt settled to get into your dream home, you can forget any kind of settlement. The creditor will insist on the full balance.

    

6. Remind the creditor that the statute of limitations is approaching on the debt and they only have a limited time to deal with you. Know when the statue is up on each debt and be prepared to give the creditor the time line.

    

7. Use the threat of bankruptcy. It will be in your best interest if the creditor believes that you have very little money and you are teetering on the edge of bankruptcy. You should approach each creditor as though this is their last chance to compromise, and get something out of your debt, before you declare bankruptcy and they get nothing. Be careful when doing this, however. If you accumulate any more debt after stating this to a creditor, (and they record all of your correspondence and phone calls), you may not be able to discharge this debt within bankruptcy.

    

Don't forget! Negotiate your credit rating with the creditor

Negotiating your credit rating

1. You should always push for a Perfect Pay Rating. Your final goal in negotiating your credit rating is to get the creditor to list your credit rating after the settlement as "Paid as Agreed" or "Account Closed - Paid as Agreed". Anything other than this listing will have a negative effect on your credit report.

    

2. Creditors make their profits by collecting from their customers, not by reporting negative credit information. Because creditors recognize this "catch-22" situation, they will often agree to delete any negative listing upon settlement of the debt. You have to realize that creditors won't try to ruin your credit rating as a personal vendetta. It's strictly business. If it pays them to collect from you and restore your rating to perfect, they will do this. Talk to them in terms of money, not principals or morals. Something along the line of "I know you would love to receive the $3000 I owe you, but it will not help my credit report if you can't change my rating to 'Paid as Agreed'. All I have is $3000 and I will pay it to other creditors who will agree to change my credit rating in writing."

    

3. Collection agencies will always agree more readily to delete the negative listing than banks or credit cards. Why? They can change their rating, no problem, but you are still probably stuck with the original creditor reporting you late. And who cares if you have a "Paid As Agreed" collection account: no matter what the rating, every collection account is a negative mark. It's no skin off their nose to change it, and of no use to your credit.

    

4. You need to get the collection agency to agree to remove their listing entirely from your report and have the original creditor change the rating to "Paid As Agreed". At the very minimum, you are within your legal rights to demand the removal of the collection account from your report. The Fair Credit Reporting Act states that you cannot have more than one listing per delinquent account (meaning you can have the original creditor report you late but you cannot have a collection listed for this same account). If they refuse to remove their rating, tell them they are violating the Fair Credit Reporting Act which can lead to fines if don't remove the collection listing. Then report them.

   Some collection agencies will tell you they have no power over what the original creditor will do regarding your credit. To some extent, this is true. However, both the collection agency and the creditor want their money. If collection agency gets paid, so does the creditor, therefore it is to their advantage to cooperate. And baloney if they tell you they don't know how to get a hold of the original creditor: did the account magically appear on the collector's desk? No. The collection agency was hired. Explain to the collection agency if they can get a written agreement from the creditor, you will pay them their money, or you will pay a more cooperative creditor with the only money you have left, and they get nothing.

   Remember, though, not all collections result from credit cards. Doctor's bills and overdue utilities cannot appear on your report. But collections resulting from these accounts can. In the case of such collections, there is no duplicate negative listing, since the original creditor is not allowed to put a listing on your account, so this collection may legally remain on your report.

    

5. Many creditors, though, have an agreement with the credit bureaus that they will not allow a negative listing to be deleted upon settlement. While this is true, the creditor can just tell the credit bureau that they reported your rating inaccurately, not that it was due to settlement. Anything a creditor reports, a creditor can change. If this wasn't the case, creditors couldn't change erroneous information they may have placed on your account by mistake, and find themselves in trouble with the FTC. In most credit organizations, there are dozens of people with the authority to make changes on the credit report. Larger creditors, such as huge credit cards or banks will require more pressure before they will agree to delete a negative listing, but virtually every creditor will acquiesce with the right amount of persuasion.

The technical terms: Two approaches to having the negative information deleted upon settlement of a debt: pre-notification of terms and post-notification of terms.

Advantage: Time will be saved and you won't be disappointed at the last moment. It is also less likely that you will have to fight the creditor later to actually delete the negative listing.

Disadvantage: When the creditor discovers that your credit is important to you, he will usually ask for a larger settlement amount -- sometimes full balance -- to meet your terms.

Post-notification of terms: Once settlement negotiations are complete, the creditor receives the agreed payment along with an attachment to the check stating the requirement that the negative listing be deleted. This approach requires use of a "conditional endorsement" document (drafted by your attorney) notifying the creditor of your terms.

Advantage: You will almost always get a better settlement amount. The creditor will often be tempted by the payoff when the terms arrive and will deposit the check without blinking at the new terms.

Disadvantage: The creditor may balk at the new terms, sending the settlement check back rather than cashing it. The creditor might still ask for more money or reject the deal altogether. If the creditor simply deposits the check without intending to follow through with your new terms, you will have to fight the creditor later and force him to delete the negative listing.

If you have to accept an imperfect credit listing as part of your settlement

You may find that some of your creditors are willing to hold out longer than you are before agreeing to delete the negative listing from your file. It may seem that they are unwilling to delete the negative listing under any circumstance. Once again, let it be said that every creditor will eventually give you what you want if you speak to the right person, are patient and persistent, and make the right offer. But if you are on a time-line, and your attorney can't get them to agree to full deletion, you have a couple of other options:

List the account as "Paid" only. You may counter-offer that the creditor list the account as "Paid" rather than delete it altogether. This is a true indication of the status of the account and many creditors will concede and agree to this wording. A "Paid" status is still very negative for a collection account or an account that will show "Paid Charge-off" or "Paid Repossession." You should insist that the account show "Paid" only and that all other negative notations (such as "Charge-off," "Repossession," late notations, or "Collection") are deleted at the same time. A simple "Paid" notation on a regular trade line is neutral and should not hurt your credit.

List the account as "Settled" only. You may counter-offer that the creditor simply list the account as "Settled" rather than delete it altogether. "Settled" is an inherently negative listing but not as negative as "Paid Charge-off." Don't agree to a "Settled" listing until you have exhausted all other possibilities. "Settled" will still trigger a credit denial. You should only agree that the account show "Settled" if all other negative notations (such as "Charge-off", "Repossession", late notations, and "Collection") are deleted at the same time. If you agree to a "Settled" notation, you must continue to work hard to delete the notation through the credit bureau dispute process.

List the account as "Paid Charge-off" or "Paid Collection" or "Paid was 30-, 60-, or 90-days late." This will be the creditor's first choice, and your last choice, of what to place on your credit report once you have paid. These notations are almost as damaging as showing the same debt unpaid. It is very common, though, for an account to be deleted (through credit bureau disputes) once it has been paid. The creditor now has no compelling reason to keep the negative listing on your report. For this reason, it is still usually a good idea to settle even if the creditor won't budge on deleting or positively modifying the negative listing.

Settling your debts
Paying Your Debts Once You have Settled

Tips on Paying

Never pay your settlements with a personal check
How you make payments is very important, as it protects you from other creditors learning about your financial status and bank account numbers. For this reason, never send a personal check. Get a cashier's check or money order. Make sure you get the money order or cashier's check from a different bank than your own bank or the post office.

Make sure you keep a copy of your money order or cashier's check and put it in a safe place!
Collection agencies keep notoriously bad records and it's your word against theirs if you say you paid and they said you didn't...unless you have the copy of the money order or cashier's check.

I negotiated a settlement with a creditor for less than I owed. The creditor is now suing me for the balance. Is this legal?

Some collection agencies will agree to settle with you for far less than you owe and then turn around and hire another collection agency to collect the difference. However, in many states this is illegal. Once a creditor deposits or cashes a full payment check, even if she strikes out the words payment in full or writes "I don't agree" on the check, she can't come after you for the balance. The states in which this law is enforced:

• Arkansas
• Colorado
• Connecticut
• Georgia
• Kansas
• Louisiana
• Maine
• Michigan
• Nebraska
• New Jersey
• North Carolina
• Oregon
• Pennsylvania
• Texas
• Utah
• Vermont
• Virginia
• Washington
• Wyoming

Some states have modified this rule. In the following states, if a creditor cashes a full payment check and explicitly retains his right to sue you by writing "under protest or without prejudice" with his endorsement, then he can come after you for the balance. But those exact words must be used. If he writes "without recourse, "communicates with you separately, notifies you verbally or writes on the check that it is partial payment, it is not enough.

• Alabama
• Delaware
• Massachusetts
• Minnesota
• Missouri
• New Hampshire
• New York
• Ohio
• Rhode Island
• South Carolina
• South Dakota
• West Virginia
• Wisconsin

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