By Margaret Reiter , Attorney UCLA School of Law
Updated by Amy Loftsgordon , Attorney University of Denver Sturm College of Law
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If you're negotiating with a collection agency on payment of a debt, consider making your credit reports part of the negotiations. Y ou can ask the collector to agree to report your debt a certain way on your credit reports. Here's how: The three major credit reporting bureaus (Experian, Equifax, and TransUnion) produce credit reports. Ask the collector to tell the bureaus to remove any negative information about the debt from your credit files. The collector might not agree, it might have to get the creditor's approval first, or you might have to pay a bit more on the debt; but it doesn't hurt to ask. And if you get the collector to agree to accept less than the full amount to settle the debt, be sure the collector also agrees to report the debt as "paid in full" on your report.
After your debt has been transferred or sold to a debt collector, it will probably appear twice in your credit history. According to the credit reporting agency Experian, this is how it works: The debt starts as a current, never late account. As you get behind on the payments, it is typically reported as being 30 days late, 60 days late, 90 days late, etc.
Then, the creditor is likely to charge off the debt. Its status will be changed to "charged off" and "sold to collections." "Charged off" and "sold to collections" are both considered a final status. Although the account is no longer active, it stays on your credit reports.
When the debt is sold or transferred to a debt collector, a new collection account is added to your credit history. It appears as an active account, showing that the debt collector bought the debt from the original creditor.
If the debt is sold again to another collection agency, the status of the first collection account is changed to show that it was sold or transferred. Once again, the final status shows that the first collection account is no longer active, but that status continues to appear as part of the account's history.
Delinquent accounts may be reported for seven years after the date of the last scheduled payment before the account became delinquent. Accounts sent to collection (within the creditor company or to a collection agency), accounts charged off, or any other similar action may be reported from the date of the last activity on the account for up to seven years plus 180 days after the delinquency that led to the collection activity or charge-off.
What Is a Tradeline?
Credit reporting agencies report information on each of your accounts separately for each creditor that holds or has held that account. Creditors refer to each separate reporting of the account as a "tradeline." If a creditor transfers an account to a different creditor or sells the account to a collector, that creditor's or collector's information is reported in a new tradeline.
So, you might have more than one tradeline that deals with the same debt.
Because creditors are not required to report information to a credit reporting agency, when you negotiate a debt settlement, ask to have any negative information about the debt removed from your credit files. The collection agency might tell you that they can't make that decision—only the original creditor can remove the information. Ask for the name and phone number of the person with the original creditor who has the authority to make this decision.
Call that person and ask. Explain that you're taking steps to repay your debts, clean up your credit, and be more responsible. Emphasize that a clean credit report will help you achieve your goals. Be honest, but paint the bleakest possible picture of your finances. Explain illnesses and accidents, job layoffs, car repossessions, major back taxes you owe, and the like.
If the collection agency agrees to settle for less than you owe, be sure it also agrees to report the debt it holds as "satisfied in full" to the credit bureaus. Get written confirmation from the creditor and the collector. The debt collector's confirmation should say that it will acknowledge the debt as paid in full when you pay the agreed amount.
Potential Tax Consequences of Settling Debt
The IRS generally considers canceled debt of $600 or more as taxable, and settling debts for less than what's owed can increase your tax liability depending on your tax bracket and the canceled amount. Consult a tax professional for more information.
If the creditor, or the debt collector if it has the authority, agrees to delete the original account line, get confirmation that it will submit a Universal Data Form to the three major credit reporting agencies deleting the account/tradeline. If the debt collector doesn't have the authority to act for the original creditor to delete the account information on the original debt, you might need to contact the creditor and the debt collector separately.
If you need help negotiating your debts, consider hiring a lawyer to help you.
Good debt settlement attorneys have negotiation skills developed over three years of law school and many years of practical experience, as well as extensive knowledge about debt collections. And if you're unsure about whether negotiating settlements is appropriate for your situation, an attorney can go over all of your options and give you advice specific to your circumstances. A lawyer can help you determine whether you should attempt to negotiate your debts or if you should do something else, like file for bankruptcy. If a creditor initiates a lawsuit against you for a debt, a lawyer can defend you in the suit.
In almost all cases, though, you should not hire a for-profit debt settlement company or other scammer debt-relief company.