How To Pay Off Old Debt
If you have bad debt or old debt, you should make paying if off or settling it a priority.
Bad debt is debt that you are not current on or you have stopped paying on. Often this debt is in collections. If you have bad debt, you need to clear it up and pay it off, especially if you are preparing for an important financial milestone, like buying a house. It will also help you clean up your credit history.
If you work carefully you may be able to negotiate to pay less than you owe since many collection companies buy the bad debts for much less than what is owed.
It is important to realize that settling a debt is different than paying it off. It will read as settled on your credit report instead of paid off in full. This can lower your credit score, it's better than letting them sit on your credit report. Here's what to do if you have bad debt.
Gather a List of Your Old and Past Due Debts
First, gather the list of your bad debt. A great way to do this is to order your credit report. You should begin by listing the amounts you owe, and the companies who currently hold your debt.
You may find that some companies have sold your debt to collections agencies. If this is the case, then you will work with the collection agency rather than the original company.
Take the time to look over your paperwork very carefully to make sure you are dealing with the correct company.
Negotiate Settlements One at a Time
Next, contact your lenders one at a time. It is best to have the amount you are willing to pay in cash, so you can settle that debt as quickly as possible.
When you try to negotiate a settlement, you will need to pick a reasonable amount to offer. A good rule of thumb is to offer half of what you owe. You may also try having the company drop some late charges and other fees.
While debt settlement is a good option for some, it is better to pay the debt in full if you can afford to.
Get the Settlement in Writing Before Making Payments
Once you have negotiated a debt settlement, then you need to request that they send you the agreement in writing. This will give you proof that the debt is paid off once you've paid the agreed-upon amount. Be sure to keep several copies for your records.
Once you receive the letter, then you can send the check for the agreed-upon amount to the company. This protects you from the company going back on the agreement. You should send a cashier's check or money order and not a personal check.
Continue With the Next Debt on Your List
Once you have cleared up one debt, then it's time to move on to the next one. You will go through the same process with each bad debt on your list.
Keep in mind that it may take you a few months to save up the money to negotiate a settlement, but it will be worth it.
If you only have a few items you should be able to move through the list quickly. If you have several, it may take more time, but it is worth clearing up your credit report.
Be Prepared to Pay More in Taxes When You Settle Debts
Any debt that is forgiven is considered "income," so it is important to take that into account when you negotiate a debt settlement. You may want to adjust your withholdings so that you do not owe the IRS at the end of the year, or you may set aside money in case you have a tax bill as a result of a debt settlement.
Make Budgeting a Top Priority
Once you begin the debt settlement process, you should do everything you can to prevent yourself from becoming delinquent on your bills in the future. The best way to prevent this is to follow a budget, establish an emergency fund, and perhaps seek a higher-paying job.
Stick It Out
Although it may take some time to clear up old and bad debts, it is worth it. You no longer have to worry that the debt is going to come due suddenly. It also clears up your credit report, which will make it easier to purchase a home.
Consider Other Methods
There are implications with using each of these options. Therefore, it is important to carefully research each of the companies before you use one because even though there are legitimate companies out there, some are scams or unethical. Alternately, settling the debt yourself puts you in control of the entire process.
Internal Revenue Service. "Topic No. 431 Canceled Debt – Is It Taxable or Not?" Accessed Oct. 20, 2020.