Credit Card Debt Management

There is an art to credit card debt negotiation, and it’s not for the faint of heart. The first thing to remember is that the collector cannot get payment if the debt has passed the statute of limitations. Also, you should not have to pay for charged-off debt that you’ve already paid taxes on as if it were income.

If it is not past the statute of limitations, there is an outside chance that you could be sued, depending largely on the amount of money involved. It is always better to settle your debt, if possible, not only because you owe it but so as to prevent it from reappearing years later and haunting you. Because it may be with a third-party collector by the time you get around to paying it, you could settle your debt for a fraction of its true value. This is because that third-party collector bought that debt from your lender for pennies on the dollar and virtually any money they can collect from you is their profit. However, don’t forget that the difference between what you pay and what your debt actually amounts to is considered taxable income.

One major point: Something many consumers - and most debt credit counseling services - forget to negotiate is how the debt settlement will be reported. Your final payment amount is not the only thing on the negotiating table. You want that account to read, “Paid as Agreed” on your credit report. According to DebtSteps.com:

Although [Consumer Credit Counseling Services’] primary goal is a valuable one, they usually forget to negotiate on how the account will be reported, which means that although your debt is settled, your credit report will be ruined. And besides settling your debt, your goal should be to negotiate how this debt will be reported to the major credit bureaus.

If you are going to reinitiate contact with the collectors, you should ideally be prepared to pay in a lump sum, not in payment plans. This is to prevent any messiness like garnished wages, bank accounts or seized assets - again, an outside chance (depending on the monetary amount involved), but always a possibility nonetheless. Furthermore, before any money changes hands, get in writing from the collections agency the amount of the final debt payment and the fact that it will be marked “Paid as Agreed” on your credit report. Try to get a receipt of payment or at least save bank records showing that payment was made.

So you may think that if your credit report shows accounts that are “charged off” or “written off,” you got off scot-free. That is not true. It does not go away. It becomes “Zombie Debt” and it will haunt you, very likely until the day you die.

Zombie debt has been purchased by collections agencies from lenders for pennies on the dollar. These third-party collectors have real incentive to collect on the old debt because anything they collect is their own profit to keep, not to be shared in the least with the lender. So they pay up to 12 cents per dollar for delinquent debt that is not yet charged off, 7 to 9 cents per dollar for recent charge-offs and so on. They will even buy debt that other third-party collections agencies have already worked on (unsuccessfully).

Unbelievably, for a penny or less per dollar, these companies will even buy debt that is written off and outside of the statute of limitations for any kind of lawsuit. That’s why it pays to know the statute of limitations in your state because a creditor may threaten to sue you for an old debt and you’ll know whether that’s even possible. If it is out-of-state debt, consult the statute of limitations for the state where you are currently living.

So to avoid harassing phone calls and, for a time, the potential of a lawsuit, settle the debt. The bonus is that you will have more negotiating power with third-party collectors because any payment is a profit for them. Just keep the offer decent and fair, keeping in mind the basic fact that you do owe the money.

One of the most debated questions when it comes to credit reports is, what to do with debt that has been written off? Do you still have to pay that? Yes, you do, and it’s not just out of a sense of moral obligation. You really do need to get that financial monkey off your back - the specific reasons are another topic for another day.

As we enter the tax season, it is important to remember that written-off debt should be reported as taxable income. This written-off debt is technically going to be reported by your lender as a profit loss on their end, so the IRS might look for that to line up with your tax filing, reporting the written-off debt as profit. You’ll probably have to pay about 15 percent of the written-off amount. It’s an important tip to remember so your financial records stay neat and tidy and no financial nightmares return to haunt you years later.