Settling overdue student loans
Dear Debt Adviser:
I am a student who has gotten into debt from being a student. My question is, I have debt collectors sending me settlement balances, if I pay these balances offered, will this wipe out the debt in full and what kind of marking will appear on my credit report?
Susan
Dear Susan:
I am sorry to hear about your current debt situation. You are among the many college students who accumulate debt while in school and then have to deal with the consequences. Since you are receiving correspondence from debt collectors, it appears that you have been having problems paying your debt for some time.
To answer your question, let's explore the world of debt settlements.
A creditor may be willing to settle a debt for less than is owed when the account is seriously past due. These debt settlements are generally one-time payments for less than the full balance due. For example, if you owe $5,000 you may be able to negotiate a settlement for a one-time payment of $2,500 through a third-party collection agency.
Why would a creditor settle for less than it is owed? The creditor is seeking to reduce its losses and is seriously concerned about your ability or willingness to pay the debt. Recovering part of the debt is better than recovering none of it. But there is no free lunch here. You will pay a price in terms of your future borrowing for a settlement today!
A creditor is not likely to negotiate a settlement on a current account. Sometimes creditors will attempt to collect the debt in-house and then turn it over or sell it to a third-party collection agency that may be willing to accept a settlement. The account will generally be more than 90 days past due when turned over to collections.
Before agreeing to a debt settlement, you should be aware of several things:
1. The debt may not be satisfied with your settlement payment. Some collectors will turn the unrecovered portion of the debt over to another agency for collection. This practice is illegal in some states, but is not in all.
2. The IRS considers the amount of debt relief (original debt not paid as part of the settlement) as income. The creditor is required to report any amount over $600 as income to you in a Form 1099. That means you will have to pay income taxes on any such amount forgiven in your settlement that is reported by the creditor.
3. Check your credit report. As of right now your credit report likely reflects that you have not paid the balance on the account being offered for settlement and the account may be listed as a charge-off from the original creditor. This is a negative listing.
After settlement, the account will be listed as "settled in full" or "settled." This is a very negative listing and is likely to result in your being denied future credit or having to pay higher rates to get it. Also don't forget that the delinquency that led up to the settlement offer will continue to be reported in addition to the settlement for the next seven years.
I would recommend that you contact the original creditor in writing -- not the collection agency that is offering the settlement -- and try to work out a repayment plan. If the creditor is not willing to communicate with you, contact the collection agency in writing and request a repayment plan.
The debt is owed and you will be doing yourself and your credit report a favor if you pay what is due. If you decide on a settlement, get all the terms of the arrangement in writing before you send any money. This will avoid further unpleasant surprises.
If you do not have one, please consider developing a spending plan that will help you avoid problems with debt in the future. You can find information to help in the Debt Adviser article " To escape debt, change spending and lifestyle ."
Good luck!
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