Despite your best intentions, sometimes your debt can get the better of you. If you’re at the point where you feel you can’t keep up with your payments, you might consider a payoff agreement to lower your debt. Generally, creditors may not be inclined to accept payoffs right off the bat. However, as with any creditor negotiation, you may be able to succeed with good bargaining skills.
What is a credit payoff?
If a creditor will accept less than the full amount you owe, that’s known as a payoff or settlement. Although the terminology is similar, a “payoff,” in which you settle the amount of your debt for less than you owe, is very different from actually “paying off” your debt in full. As a result, you shouldn’t be surprised if your creditor doesn’t accept your first efforts to settle as they are acting in their best financial interest.
Can I negotiate a credit payoff?
A settlement offer has a better chance of being accepted by a creditor if the credit company fears that you may not pay any of the debt at all. This usually occurs after you have missed a few payments. If you can show an inability to pay, you may have more leverage in your negotiations. Have evidence of your financial hardships on hand to show your creditor. Examples of these could be earning statements or invoices for an outstanding loan that show how it’s difficult for you to make your payments.
Can I be sued for not paying my bills?
When you take out a loan or open a credit card account, you agree to make payments according to the terms of the agreement. If you fail, your creditor has every right to sue you for payment. Typically, this isn’t an ideal course of action in the eyes of a creditor, since lawsuits cost money. If a creditor will end up spending more money trying to collect from you than the amount you owe, it might not make financial sense to pursue you to the full extent of the law. However, sometimes a creditor might file a lawsuit just to scare a debtor into some type of negotiation. Almost always, reaching a payoff agreement is more desirable for both parties than a lawsuit.
How does a credit payoff impact my credit score?
Even if you reach a negotiated payoff agreement with your creditor, don’t expect it to help your credit score. While bankruptcy is the single worst thing you can do to your credit score, having an account fall into collections can impact your score as well. Negative credit actions, such as making a late payment or settling an account for less than you owe, will stay on your credit report for seven years. This may be better than bankruptcy, which can remain for up to 10 years, but it’s still a long time to have something pulling down your score.
Before accepting a “Creditor Payoff” from your lender, understand it’s important to check in with a financial advisor or credit lawyer to make sure you’re not making a huge credit mistake. The option of paying less than you owe on your credit cards is never ideal and it could be more beneficial to your credit score to make cuts to your personal budget before making the decision to negotiate such a deal with your creditors.
About the Author
John Csiszar began writing in 1989 and his work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.