Should I Settle a Collection or Pay in Full?

Sarah Edwards | December 01, 2022

Do you have an outstanding debt with a creditor that you’re unsure how to handle? Sometimes, people fall behind on their regular payments due to job loss or other life situations, and they’re not sure how to resolve the problem. They may be in so much debt that their attempts to overcome it are futile.

When consumers stop making payments on their debt, their creditor will typically send their account to collections. Collections may be an in-house department with the original creditor or an outside debt collection service.

If your account is in collections, you may be unsure how to handle it. Should you pay the debt off entirely or attempt to settle it? Both options have specific benefits and drawbacks.

Paying off debt altogether has benefits

Paying off a debt in its entirety stops all collection calls for good. Debt collectors and creditors have no reason to hound you for payment when there is no outstanding obligation. You can stop putting your phone on silent or worrying about the next collection email from a collection agency and live your life free from interference from the debt collector.

If you plan on purchasing a home, applying for an apartment, or shopping for a credit card anytime soon, you’ll want to eliminate your accounts in collections. Most lenders will refuse to approve your application until you resolve your outstanding and overdue bills.

Sometimes, employers may deny you a job if you have an overdue account in collections. No one wants to be denied employment because of their credit; when you resolve the issue, you won’t have to worry about losing a job you’d love to have.

When you pay off your debts in collection, they’ll be notated in your credit report as fully paid. A fully paid collection is better than one you settled for less than you owe. Over time, the collections account will make less difference to your credit score and will drop off entirely after seven years.

Finally, paying off a debt can be a tremendous relief to your mental health. Knowing that you have unpaid debts can be a source of anxiety and depression. Eliminating them can relieve you from constant worry about your finances.

How do you settle a debt?

While paying off the debt entirely is generally better than settling it, sometimes it’s impossible. Your debt may be too much to manage, or you may not ultimately have the money to pay it off.

To settle a debt, you’ll need to come to an arrangement with your creditor. Usually, they’ll only accept a settlement if you can afford to pay it lump-sum or spaced out over a few months. Determine what you can pay, and start negotiating with your creditor.

You’ll want to start with at least 50% of the debt’s value. For instance, if you owe $1,000, you’ll offer $500. The creditor will consider your offer and decide whether they want to counter with an offer of their own.

Once you reach a settlement agreement, you’ll want to ensure it’s in writing. If you don’t get the deal in writing, the creditor may continue to pursue you for the remainder of the debt, despite your negotiation efforts.

Let’s take a look at an example.

Check out this video to learn more about how to settle your debt:

Paying a debt in full is better than settling a debt

No, settling a debt isn’t better than paying it in full. Ideally, you’ll want to fully satisfy the obligation to maintain or improve your credit score and avoid potential legal troubles.

However, settling it can protect you from a potential lawsuit if you can’t afford to pay off the debt. You’ll also save money. Settling the debt eliminates future interest and reduces the amount you’ll repay to the lender.

When you settle a debt, the creditor or debt collector will typically report the account as settled for less than what you owed. Future creditors may see you as a potential risk since you didn’t wholly abide by the terms of their agreement, even if the account is no longer in collections.

You may also face taxes on your settled debt. Creditors will send you a 1099-C, notifying you that you must report the amount you saved as income on your tax return. The taxes you pay will likely eat into any savings from the debt, making it less beneficial than simply paying it in full.

Generally, you should pay off any accounts currently in collections in full. Doing so stops them from having a further impact on your credit score and can lift a massive burden from your shoulders.

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)

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Being sued by a different debt collector? Were making guides on how to beat each one.

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