Hi Money Minder,
Is It Worth Paying Off Charged-Off Credit Card Debt?
This might sound like a silly question, but I’m pretty clueless when it comes to managing money. So here goes: should I bother paying off credit card debt that’s been charged off and sent to collections?
I posted earlier about my rough financial situation, and your comments got me thinking about a few things. So, I wanted to ask a bit more specifically in a new post.
Here’s my deal:
I’m about to get a settlement check from a car accident that happened years ago. I’ll have $50,000 after lawyer fees, and it’s tax-free. So, I can pay off all my debt in one go.
- Over $12k in credit card debt spread across 7 cards with terrible interest rates. I haven’t made payments in over a year, so all the accounts are now charged off. I’ve gotten collection notices for 5 out of the 7 cards. Not sure what’s up with the other 2.
- Another $800-1k in medical debt that’s about to hit collections.
- I owe a lawyer $4,000 from the fall, and they’re threatening to send it to collections if I don’t pay by the end of the month.
I know collection companies usually settle for 60-70% of the original amount.
My questions are:
- Do I pay the collection companies for the credit cards that are charged off? Some people said I should, but will my credit score improve if I do?
- Is settling at 60-70% of what I owe realistic? Should I aim for even less? I used to work in sales, so I’m good at negotiating on the phone.
- Should I pay the medical debt and the lawyer before they go to collections, or let them go to collections so I might end up paying less?
Sorry if these are basic questions, but I really want to fix my situation the right way.
TLDR: Any point in paying off charged-off credit card debt that’s now in collections?
Thanks for the help,
Struggling Spender
Response from THE MONEY MINDER:
Hello There,
Hello there,
First and foremost, congratulations on receiving the settlement from your car accident. This influx of $50,000 could certainly be a game-changer for your financial situation. You’re in a position to take meaningful steps toward clearing up your debts, and it’s great that you’re seeking advice to approach this wisely.
Addressing your specific question about whether it’s worth paying off credit card debt that is charged off and in collections, the answer is yes, it can be very beneficial to settle these debts. While your credit has already been impacted by the charge-offs, paying off these debts—especially through negotiated settlements—can improve your credit profile over time, demonstrating your commitment to clearing your financial obligations. Here’s a more detailed approach to handling your situation:
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Negotiating with Collection Agencies: You’re correct that it’s common for collection agencies to settle for less than the original amount owed, typically in the range of 60-70%. Given your negotiating skills, aim for an even lower percentage if possible. During negotiations, request a "pay for delete" agreement, where the agency agrees to remove the negative entry from your credit report once the debt is settled. While not guaranteed, it can significantly aid your credit recovery.
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Dealing with Charged-Off Accounts: Handling charged-off accounts that are in collections is a bit tricky. First, identify which debts are with collection agencies and focus on those. Paying these off will stop further collection actions and potentially any legal ramifications. For the accounts not yet with collectors, reaching out to your creditors to explain your intention to settle can prevent them from escalating the situation.
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Addressing Medical and Legal Debts: When it comes to your medical and legal debts, it’s generally advisable to pay them before they go to collections. Medical debts, if reported to collections, can now be removed from your credit report if you pay them. For your lawyer’s fee, settling before the end of the month could prevent it from further damaging your credit score and avoid additional collection costs.
- Consider the Benefit of Debt Settlement vs. Credit Impact: While settling debts for less than the full amount can save you money, it may still be noted on your credit report that these accounts were settled rather than paid in full. Over time, the impact of a "settled" status fades, but paying in full can be seen more favorably by future creditors.
In conclusion, use the settlement money to clean the slate and start afresh. Approach each debt strategically, negotiate wisely, and don’t hesitate to seek professional financial advice if needed to ensure your actions are beneficial long-term. Rebuilding your credit takes time, but taking these steps now will set you on the right path.
Best of luck with your financial recovery. You’ve got this!
Sincerely,
THE MONEY MINDER
