A debt settlement offer letter is sent from a debtor (a person that owes money) to a creditor or collection agency for the purpose of offering a lump sum payment in exchange for being released from all financial obligations. The form is recommended for debt that is held by collection agencies (as financial institutions and other major creditors are less likely to entertain the letter). Before sending a debt settlement, it’s very important that the debtor verifies the debt is legitimate by sending a debt validation letter to the creditor.
Debt Settlement Tips
While sending a debt settlement letter may seem like a worthwhile attempt at lowering one’s debt balance, there are important considerations you (the debtor) should be aware of:
- Make sure you can afford the settlement amount you proposed. If the creditor accepts the terms offered, they’ll set a deadline for the final lump sum payment. If you don’t pay within this time window, you’ll be on the hook for the total outstanding balance (and you won’t be able to settle the debt again).
- Confirm the debt is real. Debt can be sold multiple times, from one collection agency to another. Through these exchanges, it’s easy for information regarding the original debt to be lost or distorted. You should never pay a debt they aren’t 100% is real. To confirm a debt is real, send a debt validation letter to the creditor via certified mail.
- Be prepared for any tax implications. If the difference between the amount owed and the settlement amount is $600 or more, you (the debtor) will need to pay tax on the amount, as the IRS considers it as income.
- Identify the age of the debt. Debt that is older than seven (7) years old is removed from one’s credit report (and if it isn’t removed, you can use a credit report dispute letter to remove it). If the debt is close to the seven (7) year mark, it may be worth waiting it out until the time period is reached. In addition to this, each state has its own statute of limitations for debt; if this time has been reached, the debtor will have a valid reason for leaving the debt unpaid should the collector sue.