How To Settle A Past Due Debt

There are tons of articles available on the Internet about how to build a good credit score. Today, I want to deal with a topic that is not often discussed. That is, How To Settle Your Past Due Debts. How do you deal with debts that are already in collections? There are a number of debt settlement companies that promise to help you settle your debts. I am not knocking these companies but it can be rather expensive to pay someone to solve your credit woes. Besides you can do most of this yourself, just follow these simple steps to settle your past due debts.

1. Organize your past due debts.

The first step to paying off your old debts is to get organized. Find all of your unopened letters from collection agencies and open them up. Next, create a file folder for all of these debts. The file folder is will you will store every letter so that you will have a record of all correspondence between you and the creditor.

Make a list of all your debts that are in collections. Put them in order by date listing the debts that are the oldest first. The further behind that you are on a debt, the lower the settlement offer that you need to make. Creditors often write off debts that have been outstanding for a long period of time. They are often happy to receive a portion of the debt since they most likely expected to receive no payment whatsoever.

For example, a 2 year old credit card debt that has been in collections for awhile is much more likely to work with you on settling the debt than a 6 month old credit card debt that has just been referred to collections.

2. Figure out your settlement offer.

Make a settlement offer for each account that has moved into collections. You can settle most debts that are in collections for just a small percentage of the amount owed. That’s because collection agencies buy old debts for just pennies on the dollar. Any money that they can collect is a profit to them.

For example, let’s say you owe $1,000 to a collection agency for a 1 year old Capital One credit card account.  The collection agency will send you letters and relentlessly call your house demanding the debt be repaid. They may even threaten legal proceedings and try to add additional fees onto this debt. Collection agencies will try to scare you into paying the full balance. Don’t be rattled. Calmly write a letter to the collection agency offering to settle this debt for $200.

Why $200? That is because most collection agencies will agree to settle a debt for just 20% of the original balance. Some may ask you to pay more but start with 20% as a floor for your settlement offer. You can always negotiate the percentage upward if they don’t want to accept your offer. Just make sure that you do not start with an offer that is too high because you cannot negotiate in reverse.

3. Draft a settlement letter.

Most creditors are not going to contact you first about a settlement offer. You can be proactive by contacting them about settling your past due debt. It’s easier than you may think to write a settlement letter. If you wish, you can write it yourself and address it to each creditor. If you need help constructing your settlement letter, you can find a lot of sample settlement letters on the Internet.

Be sure to include the following information in your settlement offer:

– include your willingness to repay the debt.

– state the amount that you are able to pay.

– request that your credit report be updated.

– ask that all legal proceedings be ceased.

– request a written confirmation of acceptance of your offer.

Settlement offers should be clear, concise and to the point. They should not be antagonistic. You are requesting that a company clear up a debt that you legitimately owe.

4. Wait for a response.

Do not mail in your settlement payment until you have heard from the creditor. Wait for a written confirmation that your settlement offer has been accepted. Do not accept phone confirmations. Collection agents are notorious liars. They will lie to get you to mail in a payment and will then proceed to harass for you for the remaining balance.

Once you receive the letter stating that your offer has been accepted, you can now mail in your payment. Include a copy of the settlement offer, and acceptance letter with your payment. Hold onto the originals for your files. Keep a copy of the money order or canceled check that you paid with in case there is any discrepancy down the road.

Finally, check your credit report. Make sure that your credit report reflects that your account has been paid.

After you have done all of these things, you are now ready to rebuild your credit!

Photo by Casey Serin


  1. Also, if a bill goes to collections, try to work it out with the company rather than the collections agency.

    It’s a win-win for both. The company doesn’t have to pay the collections and this will not end up in your credit report. (In most cases).

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