Can Debt Collectors Cancel My Balance?

A debt collection agency hired by a creditor is responsible for recovering past-due debts and helping debtors bring their accounts current. Creditors typically want debt collectors to recover the entire past-due amount or the total amount of the debt, depending on the severity of the delinquency. However, in some cases, a debt collector may be able to cancel a portion of your debt with creditor approval.

Settlement

A settlement is a debt-elimination strategy that involves offering a debt collector less than the full balance of the loan in exchange for cancellation of the remainder of the debt. A debt collection agency may consider a debt settlement if it has the approval of the original creditor or it has purchased the debt from the creditor. Once you have paid the agreed-upon settlement amount, the debt collector will consider the loan paid in full and will cease collection activity.

Negotiating a Settlement

A debt collection agency may not be willing to accept a settlement offer on first contact -- its collection manager may believe that it can realize a higher profit from pressuring you to pay the full past-due amount or loan balance. However, if you offer to provide documentation of your income and expenses, and send this information to the agency, a follow-up conversation with a collection agency representative may yield more favorable results. If you can show that you have the funds to settle a debt, but do not have the income to repay the debt in full, the collection agency may accept your offer.

Benefits of Settlement

Canceling part of your debt through a settlement provides you with the advantage of removing a debt payment from your monthly expenses. This can free funds to pay down another debt more quickly, which can help you become debt-free more quickly. Settling a debt also improves your debt-to-income ratio, which may improve your credit score, particularly if you carry a high amount of debt compared to your earnings.

Consequences of Settlement

Although debt settlement can offer advantages, it can also have drawbacks. If a debt collector cancels more than $600 in debt as part of a settlement agreement, you will have to pay taxes on the forgiven amount as earned income. Also, the debt collection agency will report the debt as settled to credit bureaus -- this can cause credit damage that can offset the credit benefit of lowering your debt-to-income ratio.