Q.  Unpaid debt from years ago has damaged my credit and some has been charged off.  Should I be contacting these collection companies to see if there is an outstanding amount and pay the past due debt? 

 

I’m sorry that you fell behind with your payments, but congratulations for wanting to deal with the issue.  Here’s what I recommend:

 

  • Make sure you have $1,000 in emergency savings collected first. No matter how well you plan your expenses, something unexpected seems to pop-up periodically and it’s good to be financially prepared.

 

  • If the creditors are not calling right now, the debt may have been charged off. I would not contact them at this time.  Instead, I’d recommend you begin to accumulate “debt settlement” money.  Set aside as much as your monthly budget allows.  Keep your spending as low as possible to quickly accumulate extra cash.

 

  • List your past due debt in smallest-to-largest balance order.  Once you have about 50% of the smallest debt saved in cash (not counting your $1,000 emergency fund), I would contact the first collection company (the one with the lowest balance owed).  Offer them 50% of the amount owed to settle the debt IN FULL. They may well take the offer as they are not expecting to collect anything at this point.  Most likely, they bought the past due debt for pennies on the dollar from another creditor, so a 50% settlement deal will turn a profit for them.

 

  • If they refuse, say, “OK, I’ll move on to another creditor.”  They may quickly change their mind!  If they don’t, continue saving each month until you get to 50% of the second largest debt.  Then try the 50% settlement offer with the second creditor.

 

  • Once you’ve made your way through the list, go back to the beginning and make the same offer to any that didn’t accept it the first time (again, after you’ve saved up enough cash to immediately send the agreed upon payment).  They may be more willing to accept it the second time around.

 

Over time, settling these accounts will help your credit score and remove the charge-off from your file.  Just remember to “wake up” only one creditor at a time!  Make a deal with them (if possible) and then move to the next creditor.

 

If you reach an agreement with a creditor and are going to send payment, here are some things to remember:

 

  • Only send payment after you have received confirmation IN WRITING that the payment will settle the account IN FULL.  An emailed confirmation is fine.  GET IT IN WRITING BEFORE SENDING PAYMENT.

 

  • Do not allow them electronic access to your account…..ever.  They may clean you out!

 

  • Go to your bank and get a Cashiers check and mail it via USPS Priority Mail.  This will give you a tracking number to prove they received it.  The cashiers check will keep them from knowing your personal checking account number (see #2).  It will cost a few bucks in postage (and possibly a fee for the cashiers check) but it is well worth it.

 

  • Keep a file with their written confirmation of settlement, a copy of the cashiers check and a print out of the delivery confirmation FOREVER.  They may pop back up years from now saying you owe them more money.  If that happens, send them copies of the written confirmation, Cashiers check and delivery confirmation.

 

John is a CPA and personal finance coach.  Email your questions to john@60minutefinance.com.

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If you need confidential financial coaching for your particular situation, please contact John for a no-cost, no-obligation discussion of your needs.

 

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