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Being able to settle a debt for less than you owe can be a godsend when you’re overwhelmed with debt. But the downside is that you incur credit damage for each debt that you settle. And while tricks like “pay for delete” may sound like they can help you avoid that credit damage, the reality isn’t all it’s cracked up to be. This is what you need to know…

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What is pay for delete?

Pay for delete refers to the process of getting a collection account removed from your credit report by a debt collector. It’s a point you can use during a debt settlement negotiation, as you settle a debt for less than you owe. You agree to pay a certain amount of money in your settlement. In exchange, the collector agrees to remove the collection account from your credit report. In some cases, a collector may require a debt to be paid in full to agree to remove the account.

How do collections affect your credit?

When a creditor sells a debt to a third-party lender, a collection account appears in the public records section of your credit report. This account remains on your credit report for seven years from the date the debt first became delinquent. So, once you settle a debt to get rid of it. The credit notation about that account sticks around for another seven years after that.

Collection accounts are bad for your credit history, which is the biggest factor used to calculate your credit score. As a result, collection accounts can significantly drag down your credit score.

Is it really possible?

In theory, yes. In fact, it used to be a negotiating tactic that settlement companies would use to get consumers to pay a higher percentage of the debt owed. They would offer to remove the collection account if you agreed to pay a higher percentage of the balance owed.

However, in 1970, Congress enacted the Fair Credit Reporting Act to promote “accuracy, fairness, and privacy of information in the files of consumer credit reporting agencies.”[1] The goal of the law was to protect Americans from inaccurate reporting. For instance, it allows to correct mistakes in their credit report through the process of credit repair.

However, an offshoot of the law is that it requires information furnishers to provide accurate information to credit reporting agencies. This means lenders, creditors, and debt collectors must, by law, report accurate information. If they don’t, they can lose their access to all consumer credit reports entirely.

What this means for consumers

The FCRA allows creditors and debt collectors to amend what they have reported to the credit bureaus. This is the process that allows them to correct errors when they happen. However, the FCRA stipulates that credit furnishers must report information accurately. So, pay for delete skirts a legal line. You legally incurred the collection account. Thus, you legally incurred the credit report penalty that comes with it.

By the strict letter of the law, credit bureaus can decide to bar a debt collector from accessing and consumer credit files, if they are found to be providing false information. In this case, reporting that there wasn’t a collection account could be considered falsifying information. So, collection agencies can hurt their business by granting you pay for delete.

As a result, pay for delete is really iffy, even if a collector says they’ll do it. They may remove the collection account from your report right after the settlement. However, then it can reappear later. If it does, you have no legal recourse because the collection account was reported accurately. So, you can end up paying a higher percentage of your balance to get pay for delete, only to lose that benefit later. And there’s nothing you can do to get it or the extra money you paid the collection agency back.

Is it even worth trying?

This depends on your goals. If you’re using debt settlement, your goal is usually to get out of debt as quickly as possible, for the least amount possible. Your credit score often isn’t a big concern, because you’re score has already been dinged by delinquent payments and collection accounts. It’s the old adage that you can’t fall off the floor. If your credit is already low, then a few more negative items aren’t going to affect it that much more.

Still, if you’re trying to settle debt on your own and want to minimize credit damage, it can be worth trying. Some collection agencies will do it and it may even stick permanently. This would help alleviate some of the credit damage that you incurred during your challenges with debt.

How does pay for delete work?

If you’re thinking of trying to negotiate pay for delete, make sure to get everything in writing. You never want to do any debt settlement negotiation verbally over the phone, whether you do pay for delete or not.

  1. If a debt settlement company contacts you by phone, ask them to send you a letter with their offer. It may sound old-school, but all communication should use physical mail.
  2. Read their offer when you receive it, checking to see if they make any mention of deleting the account in exchange for payment.
  3. If it doesn’t, write them a debt settlement counteroffer letter offering to pay that amount in exchange for removing the account.
  4. If you want to initiate pay for delete settlement, use this letter to make the initial offer.
  5. Once the debt settlement company agrees, they should draft up an official debt settlement offer with the terms of the settlement outlined.
  6. They’ll send you a copy that you sign, then copy and send it back. Make sure to keep the originals for your own records.

Again, keep in mind that pay for delete skirts a legal line. So, even getting pay for delete written in an offer won’t guarantee you have legal recourse later if the account reappears. A contract can’t have terms that violate the law. And since the Fair Credit Reporting Act says that collection agencies must report information honestly, you won’t be able to sue them for not holding to pay for delete.

In other words, if you decide to go this route, pay for delete will be nice boost if it sticks. But go into the settlement process with the understanding that it may not work permanently in all cases.

Debts that don’t require pay for delete to remove credit damage

It’s definitely worth noting that some collection accounts can drop off your credit report without pay for delete. If you meet certain payment requirements for these debts, the credit bureaus will remove them from your report. You won’t have to wait seven years for them to stop affecting your credit score.

Defaulted federal student loans

If you have defaulted on a federal student loan, you can simply make nine consecutive, on-time, full monthly payments in a 10-month period to bring the account current. First, you contact the lender to let them know that you want to rehabilitate the loan. Once you’ve made nine payments on time, the loan will no longer be in default. You can effectively erase the damage it was causing to your credit score. This is legal and happens with any federal student loan that you rehabilitate.

Medical collections that are paid by insurance

In 2015, the three credit bureaus launched the National Consumer Assistance Plan. It was designed to help improve credit report accuracy and access. A big part of the plan addressed the challenges presented by medical debt collections. One specific provision stipulates that any medical collection account that is paid by an insurer must be immediately removed from the consumer’s credit report.

This helps people who face medical collections as a result of an insurance payout error. If insurance was supposed to cover a procedure or medical expense, but instead it went unpaid and got sent to collections, then the collection agency must remove it when the error gets fixed.[2]

It’s also important to note that the National Consumer Assistance Plan also requires collection agencies to wait 180 days before reporting the collection account. This allows time for insurance payments to process. It also gives you time to handle a medical collection account before it affects your credit.

How new credit scoring models minimize collection damage

It’s important to note that just because something gets noted on your credit report, this doesn’t mean it will affect your credit score. In addition, some factors affect your score more than others, and collection accounts are beginning to affect your score less and less.

New credit scoring models, such as FICO 9 and VantageScore 4.0 do not give the same “weight” to medical collections as they give to other types of collection accounts. Essentially, this acknowledges that medical collections aren’t necessarily a sign that someone is irresponsible with credit, which is what your credit score is supposed to indicate. Additionally, FICO 9 also completely ignores any collections accounts that are under $100. They’re not factored into your score calculation.[3]

Be aware that these newer scoring models are not yet as widely used by lenders as previous models. Currently FICO 8 is the most widely used scoring model in lending decisions. But eventually, most lenders will transition to the newer model, which will be good for consumers.

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Article last modified on November 13, 2019. Published by Debt.com, LLC