Making Payment Arrangements on Old Bad Debt

Before making a commitment to set up a payment arrangement with a debt collector, you need to know several key facts about the arrangement.  Here are a few important questions to ask:

Who are you talking to?  How do you know that they own the debt? Are they legally collecting it?  If you make a payment, where is your money going? How old is the debt? What is the exact amount they allege you owe?

These are all reasonable questions that you must have an answer to before proceeding.  It is your right to validate the debt.  The biggest scam out there that isn’t talked about is bad debt.  Every week I meet new clients that are paying ‘Joe Scammer’ for a debt that doesn’t belong to them.

To become a collection agency is easy. If you have $500 dollars and a couple of weeks to spare, you can get a license to access the credit bureaus “for collection reasons”. Get yourself a cell phone with caller id manipulation, make up a good line, and viola! – you can now make money in your underwear.  This is happening everywhere and way too often.  This is why you absolutely want to validate the debt.

Know your rights. It’s safe to assume that anytime a debt collector’s lips move they are lying.

By law, collection agencies can not threaten anything outside of normal collection proceedings.

This means that they cannot threaten using criminal consequences as an ultimatum. They cannot threaten to arrest. They cannot threaten with judgments or sue for a debt that is over the statute of limitations. Also, they cannot threaten to garnish any wages within a state that doesn’t allow it. Knowing these details will help you navigate through the lies.

It is important to know that making a payment arrangement involves creating a new payment agreement. This new agreement then becomes a new contract and restarts the statute of limitations. If they weren’t able to sue you before due to the age of the debt, now they can – if it defaults. This also means that the debt re-ages, so not only does the seven year period start over, but the date of the derogatory refreshes scoring it as a new debt.

There’s more to consider before paying off old debt. If you’re under the impression that making a payment on-time will help your score in this scenario – you’re mistaken. On the contrary, each new payment only updates the derogatory each month. It doesn’t matter what the balance is as the balance has no impact on the score.

Most creditors or collection agencies will discount or settle a debt if you can pay it off upfront. However, the longer you take to pay out the debt, the less of a discount or settlement they are willing to give.  So, if they cant sue you or it’s not likely that they would, and you insist on paying off the debt then pay yourself for the next few months. Then make the call to settle the debt.

Make sure to read Settling Old Bad Debts and How it Affects your Credit Score as this will help you decide on which debts to settle. Certain extraordinary circumstances could force you to pay off the debt just keep your eyes wide open when you do.

In my opinion, third party collection agencies who have bought debt are just random companies gambling on the bad times of others.  He is the lowest priority. I’ve made no commitments to him nor do I owe him squat! I feel that if the original creditor who sold the debt to him gave me the same offer, I would have taken it.  The bottom line is this:

I’m not going to be in a hurry to pay off some random company only to re-age the debt and kill my credit score in the process. 

Now my motivation could change if I were facing a judgment or a circumstance that demands I pay it off. My motivation may change if I can convince the collection agency to agree to a ‘pay for deletion’.  This removes the account completely off my credit report as opposed to only posting sold.

When dealing with an original creditor that still owns the debt, be open to negotiating and settling the debt.  In most cases, this will not kill the credit score and could even help it. However, in this circumstance, don’t make payment arrangements! Save up the funds needed and when you are ready to pay – call and make the offer.

With so many variables at play, certain circumstances could force our hand. Let me give you an example. A client of mine recently received a job offer to work for a company that required employees with outstanding debt to have payment arrangements made. This had to be set up before my client could start working. So what should he do? There’s only one answer – set up the payment arrangement and start working! Before making a decision, get to know all your options and the outcome of each. If this was helpful to you, please leave a comment below!

Dennis Hubbard

Dennis Hubbard

President, CEO and Credit Guru at Credit Firm, Inc.
Veteran of loan origination since 1994.Speaks fluent FICO with a redneck accent. Assisted thousands in achieving and exceeding their credit goals since 2009.Expert in state and federal laws regarding collections, credit, and loan origination.Pushes all the right buttons to make people and systems move.His principles and methods of the scoring process can only be heard here at Credit Firm Inc. - The only credit consulting company that guarantees a credit score goal.
Dennis Hubbard

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