Paying Defaulted Credit Card Debts

Paying back defaulted credit card debts is a tricky move to make...make sure you understand what you're doing first.

When a credit card defaults (called a "charge off"), the damage to your credit has been done and it cannot be undone by later paying back the debt. You'll be stuck with bad credit regardless of what you do. Paying back this debt will not remove it from your credit report. A charge off stays on your credit report for 7 years...paid or unpaid. It won't make a huge difference in your credit rating if you pay it back, but it does look better that the debt was paid.

If you're going to pay it back, you want to settle the debt for less up front in a one-time, lump sum payment. That way the debt is resolved.

** Never renew contact with debt collectors over old credit card defaults if you can only afford to pay small amounts per month. They don’t want small payments over several years. Also, getting on a monthly "payment plan" for defaulted debts will not reactivate your accounts and give you good credit again. Only renew contact with debt collectors if you can afford to settle the account up front. If you can’t, then wait and save your money until you can afford to settle up front for less.

Mail or fax your settlement offers to the debt collectors that have your accounts. Offer to settle @ 25% of the defaulted amount and go from there. What you want is a settlement letter on their letterhead stating that the account will be "Paid in Full" once the agreed to amount is paid. Once you get this, pay with a USPS money order. Photocopy everything and keep in your records forever as documentation that the debt was settled. Believe me, you'll need it. Never agree to any settlement over the phone unless you get the terms in writing. Never give debt collectors you bank account numbers for payment.

- FYI: Many collection agencies that deal with old credit card defaults are highly aggressive, and you may get an unpleasant surprise at how they respond. Collection agencies have no obligation to take any settlement for less and it's their right to demand the full amount if you renew contact with them.

The following collection agencies are known to be unpleasant and aggressive: NCO, Midland, LVNV, Calvary Portfolio, Portfolio Recovery, Asset Acceptance, Collect America/CACV, Aurora Gold, Fred Hanna, Unifund

- If your defaults are small....it's better to pay them in full

- Any debt that is forgiven/settled must be reported to the IRS as earned income.

- Keep your offers to settle debts in writing. Mail or fax offers to them. Keep the offers polite and to the point. Avoid using any of the form letters you see online that are threatening or legalistic in tone. Example letter:

I am willing to resolve this matter for 25% of the original amount if your firm will send me a letter on your letterhead confirming that this debt will be "Paid in Full" once this amount is received by me. Upon receipt of this letter, I will send you a money order for this amount.