Learn How to Respond to a Settlement Offer

What to Do When a Creditor or Collector Reaches Out

womansortingbillsoncellphone_uniquelyindia.jpg
uniquely india / Getty

Getting a settlement offer on a debt you couldn’t afford to pay in full is one of the best things that can happen. You don’t have to open up the discussion and convince the creditor to settle the debt with you because they’ve already made that decision.

Don’t get too excited about the prospect of finally being rid of this debt. Before you pay or even speak to anyone about the settlement (particularly a debt collector), you need to be sure the settlement offer is legitimate.

Consider Important Debt Time Limits

Debt collectors have been known to send settlement letters as a trick to get debtors to make one or more partial payments on a time-barred debt, that is one whose statute of limitations has expired. The payment would restart the statute of limitations giving the collector more time to sue you for the debt. Check the statute of limitations for your debt before proceeding, especially if a debt collector makes the offer. If the statute of limitations has expired or is close to expiring, settling the debt may not be worth it.

The credit reporting time limit is also an important consideration for settling debts. If the debt is still being reported on your credit report, the settlement will impact your credit score almost as much as a bankruptcy. On the other hand, if the debt is no longer on your credit report, there’s less benefit to settling the debt since the blemish of an unpaid balance no longer exists.

Beware Scam Settlement Offers

There have been instances of debt collectors sending fake settlement letters, sometimes even for fake debts, in an attempt to swindle consumers out of money. Before you pay any money on an unsolicited settlement offer, make sure you’re dealing with a legitimate company and that the debt is yours.

Then, you can proceed with payment if that’s the action you want to take.

Spotting a fake settlement offer can be tough. Some signs the letter is not legit include misspelled words, improper grammar, vague references to "our client" or what happens after you settle, the absence of information about discharged debt being reported to the IRS, or directions to pay via wire transfer, Green Dot prepaid card, or another untraceable payment method. Fake settlement offers are more likely to come from collection agencies than from the original creditor.

Two Options for Taking the Settlement Offer

If you receive a settlement offer and decided you’re interested, there are a couple of ways you can respond.

You can accept the settlement offer and pay the account in full. This is the easiest and fastest way to deal with the debt, assuming you’ve received a legitimate settlement offer. Read the settlement offer carefully or have an attorney review the offer to be sure it’s legally binding – that the creditor or collector can’t come after you for the remaining balance at some point in the future.

Or, negotiate a lower settlement. Your creditor may be willing to accept a lower settlement than the one offered in the letter.

Since the door for settling the debt is already opened, you can use this opportunity to see if the creditor is willing to accept a lower payment. Before you give a call or send a letter of negotiation, make sure you have an amount in mind. You’ll have more leverage if you’re able to pay the offered amount right away.

In either case, before you make a payment, get the terms of the settlement in writing, on company letterhead with a signature from someone within the company who’s authorized to make this offer to you. Make sure the offer specifies that the remainder of the debt will be canceled after your payment.

If You Don't Want to Settle

You don’t have to take the offer. Maybe the settlement offer is too high or maybe you’re just not interested in paying off this debt at this time. In either case, you don’t have to respond to an offer you’re not interested in taking.

Keep in mind for as long as the debt remains unpaid, creditors or their debt collectors may continue collection efforts including listing the debt on your credit report if it’s within the credit reporting time limit. You can stop communication from a third-party debt collector by sending a written cease and desist letter.

Tax Implications of Accepting a Settlement Offer

Note that if the more than $600 of the debt is canceled with the settlement, there will be some tax implications for next year’s tax season. You may receive a 1099-C Cancellation of Debt form requiring you to list the canceled debt as income on your tax return. Make sure you include this notice with your other income and expense document when you visit your tax preparer.