Summary: Paying a defaulted debt in full is usually the best option. However, if you can’t pay in full, payment plans and lump sum settlements are close seconds. Solo can help you negotiate settlements with creditors to end your debt.

It might be tempting to beat yourself up if you’ve had a debt go to collections. However, you can still take action. Negotiating a payment plan or settlement will minimize damage to your credit score and protect you from debt lawsuits.

Can’t pay your debt in full right now? You still might be able to resolve it. We’ll take a look at whether you should choose a lump sum vs. payment plan for debt settlement.

And check out our debt settlement guide to learn more about how to settle your debt.

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Reach out to the collector to ask about a lump sum vs. payment plan for debt settlement

Most people who have had debt go to collections can’t afford to pay in full. If they could, the debt likely wouldn’t have gone to collections in the first place.

If you get a call or a letter from a debt collector and you can’t pay off the debt, don’t ignore it. If you do, the debt collector may file a lawsuit against you. You can still settle debt after a lawsuit has been filed, but the debt collector will probably be more flexible if you reach out now.

At this point, you can try to resolve the debt in one of two ways:

Lump Sum: You make a one-time payment of an agreed-upon amount.
Payment Plan: You pay the full amount in installments over time.

Having a debt go to collections will damage your credit. Like other negative items on your credit report, it will stay for seven years (15 U.S. Code § 1679c).

The actions you take next can either minimize that damage or make it worse:

Paying the defaulted debt in full can keep credit damage to a minimum.
Settling the debt will show up as a negative mark on your credit report, but it’s better than not paying at all.
Not paying at all leads to the worst credit damage.

Typically, negotiating a payment plan with a debt collector means that you’ll end up paying the debt in full. As long as you make all payments as agreed, the account will show up as “paid” on your credit report. This will protect your reputation with lenders and make it easier to get things like auto loans and mortgages.

If you’re settling the debt by paying less than its full value, most debt collectors and creditors will ask for a lump sum payment. The debt will be marked “settled” on your credit report. Settling a debt means that you didn’t pay it in full, so many lenders will be hesitant to offer you credit, at least for a while.

Want to settle your debt without making a single phone call? Get started with SoloSettle today!

When should you do a payment plan?

Generally, it’s a good idea to do a payment plan if:

You think you’ll be able to pay the full value of the debt over time.
You want to minimize damage to your credit score.
The debt collector or creditor hasn’t sued you yet.

To see how negotiating a payment plan might work in practice, let’s take a look at an example.

Example: Juan owes a debt collection agency $1,000. He’s barely scraping by right now, but he wants to avoid the stress that comes with getting sued for debt. Juan looks at his finances and decides he can afford to pay $200 per month. He calls the debt collector and asks if they accept payment plans. The collector agrees to let Juan pay $200 per month for five months. Juan sticks to the payment plan, and by the end of it, his debt has been paid in full.

The Fair Debt Collection Practices Act (15 U.S. Code § 1692) places many restrictions on what debt collectors can do. However, it doesn’t require them to accept payment plans or debt settlements.

If you’ve already been sued for a debt, most creditors won’t accept a payment plan. That might seem unfair, but look at it from the collector’s perspective.

Debt collectors usually send many letters and make countless phone calls before filing a lawsuit. Since you haven’t communicated with the collector about the debt until now, they might reasonably worry that you’ll set up a payment plan and then not pay. That would mean the collector would have to file a lawsuit against you again.

You can always ask for a payment plan, even after you’ve been sued. Just be prepared for the debt collector to say no.

This video explores questions to ask yourself before you make an offer to settle a debt.

When should you do a lump sum?

It’s usually a good idea to negotiate a lump sum settlement if:

Paying in full just isn’t financially feasible.
You have enough money to pay around half of the debt right now.
You’ve been sued for the debt or are otherwise in a time crunch.

If you’re settling for a lump sum, most debt collectors and creditors will be willing to negotiate with you. As a general rule of thumb, we suggest offering 60% or less of the debt to start.

However, before you start negotiating, you should find out whether you’re dealing with a debt buyer or an original creditor.

Debt buyers purchase debts for a small fraction of their face value, so even if they settle, they can still generate a significant profit. Many debt buyers are willing to accept 30% to 40% of the face value of the debt. In some cases, they’ll accept even less.

When original creditors settle, they’re trying to minimize their losses. They tend to settle for higher amounts, if they’re willing to settle at all. Expect an original creditor to demand 50% to 75% of the debt’s original value.

To see how negotiating a lump sum settlement may work, let’s consider an example.

Example: Jessica receives a letter in the mail that says she’s being sued for $3,000 in old debt. She uses Solo to check her state’s deadline to reply to the suit. Jessica sends an Answer letter to continue the lawsuit and then tries to settle. She looks at her finances and decides that the most she can do is $2,000. Jessica sees that she’s being sued by a debt buyer, so she decides to send an initial settlement offer of $1,000. The debt collector counters with $2,000. Jessica offers $1,500, and the debt collector agrees.

If you’re negotiating a lump sum settlement yourself, get a copy of the agreement in writing before sending any money. That way, you’ll be able to defend yourself if the collector accepts a settlement and then tries to sue you for the difference anyway.

Sued for debt? Use SoloSuit to send your Answer in minutes.

Key takeaways: Lump sum vs. payment plan for debt settlement

If you’re deciding between a lump sum vs. payment plan for debt settlement, keep the following in mind:

With a lump sum settlement, you make a one-time payment that’s less than the total value of the debt.
With a payment plan, you make multiple installment payments that (usually) add up to the full value of the debt.
It’s best to propose a payment plan before you’ve been sued for the debt.
If you’ve already been sued, many debt collectors and creditors will only accept a settlement.
Look at your finances to see how much you can afford to pay before you make your offer.
If you settle a debt, get the agreement in writing before you pay anything.

When you’re negotiating wth debt collectors, it always helps to be courteous. Remember that they aren’t obligated to settle with you. Good luck!

Make debt settlement simpler with SoloSettle.

FAQ

Is a payment plan or lump sum settlement better for a defaulted account?

That depends on your situation. If you’ve defaulted on a debt, setting up a payment plan to pay the debt in full is better for your credit. If you’ve been sued for the debt or the creditor won’t accept a payment plan, try to negotiate a lump sum settlement. Either one is better than not paying anything!

Is it better to do a settlement or pay in full?

When you settle a debt, you’re generally paying less than the full value. Because you haven't paid the debt as agreed, this tends to look worse to lenders than paying it in full. In contrast, paying a defaulted debt in full can minimize damage to your credit score.

What happens if you don’t pay anything?

If you fail to pay a debt and the creditor sues you, they may be granted a court judgment against you. The judgment allows them to garnish your wages or take other extreme actions to collect the debt. Federal law puts limits on wage garnishment (15 U.S. Code § 1673), but having your wages garnished can still put you in financial trouble.

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Lump Sum vs. Payment Plan for Debt Settlement