Whether you experienced a tough financial situation or simply forgot about a debt you owe, collection debts can happen. Having an account in collections damages your credit score, and you’ll be hounded by debt collectors for the money owed. However, it may be possible to get collections accounts removed from your credit reports and reverse some of the negative effects with a pay-for-delete arrangement.
This strategy can be tricky, and it doesn’t work 100% of the time. Plus, pay-for-delete falls into a legal gray area for credit reporting. So if you’re thinking about negotiating a pay-for-delete agreement, here’s what you need to know first.
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What Is Pay-for-Delete?
“Pay-for-delete is a method of paying and requesting removal of a derogatory item from your credit report,” says Shawn Lane, co-founder and chief executive officer of Financial Renovation Solutions, a credit repair company. In other words, you can offer to pay some or all of the amount owed in exchange for the debt collector removing it from your reports.
While a pay-for-delete request is unlikely to work with the original creditor, a third-party debt collection agency might be more amenable. Though don’t be surprised if the debt collector refuses: Removing an accurately reported item from a credit report may violate its reporting agreement with the credit bureaus.
A delinquent bill doesn’t go to collections right away. Once a bill goes unpaid for a length of time — often, around 180 days — it’s considered seriouslydelinquent. At that point, the creditor is likely to decide it isn’t worth the time and cost to continually try to collect the debt and instead will sell it to a collection agency for a fraction of the total amount owed.
In turn, the collection agency will take over and attempt to collect the payment from you.
A bill sent to collections will stay on your credit report for seven years from the date of first delinquency. The more recent a negative entry, like a collections account, the worse the impact on your credit score.
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How Pay-for-Delete Affects Your Credit
Even one missed payment can have a negative effect on your credit, but allowing a bill to get to the point of being sent to collections is especially harmful. Pay-for-delete could improve your score by removing a negative entry from your credit, but how much will it help?
“This will be different for everyone, as each person’s credit file is different,” Lane says. “However, a successful removal of a derogatory collection account from a credit report should generally improve the credit score.”
That said, the positive effects could be minimal if you have multiple accounts in collections.
Donald E. Petersen, an Orlando, Florida-based consumer protection lawyer, says, “Unless all of the consumer’s debt collectors agree to and follow through on the pay-for-delete, the consumer may still have adverse trade lines dragging down their credit score substantially.”
Petersen also warns that some less reputable collection agencies will accept payment and then fail to remove the negative item. It’s important to get the agreement in writing, which he says could be enforced in court.
Finally, note that if you’re negotiating with a collection agency, a pay-for-delete will only remove the collection account. The original debt, plus any late or missed payment information, will still appear on your credit report. That means that even if you successfully negotiate a pay-for-delete agreement, it might not make much difference overall.
Pay-for-Delete Becoming Obsolete
Even if you could theoretically negotiate a successful pay-for-delete agreement, it may not be worth the trouble in many cases. Newer credit score models, including FICO 9 and VantageScore 3.0, ignore collections accounts that have been paid off. So they essentially consider these accounts as deleted, even though they technically still show up on your reports.
Lane also notes that for those with delinquent medical debt, there have been a few helpful updates in the past couple of years to how it’s reported. For one, there is now a 12-month delay before an unpaid medical collections debt can show up on a person’s credit report, rather than just six months previously.
“This gives a consumer more time to resolve the debt and more time for insurance to process it,” Lane says. Additionally, credit bureaus no longer report medical collections that have been resolved. “The credit bureaus will automatically delete a medical debt that has been paid in full or settled for less than the amount due,” he says. Finally, credit bureaus will no longer report medical debts below $500.
How to Write a Pay-for-Delete Letter
If you decide to pursue a pay-for-delete arrangement, the next step is writing a pay-for-delete letter and sending it to the creditor or debt collector.
In the letter, you should explicitly state that you’re offering to pay the debt in full or settle a portion of it in exchange for having it removed from your credit report. Before sending any payment, be sure to get a written agreement back that acknowledges the terms of your deal.
There are plenty of templates online of pay-for-delete letters you can use. In general, your letter should include the following:
— Your name and address.
— The date.
— The creditor or collection agency’s name and address.
— Your account number.
— Proposed payoff amount and terms of the pay-for-delete.
— Payment method if an agreement is reached.
— Request for written and signed acknowledgement.
— Deadline for the creditor to respond.
— Your signature.
Alternatives to Pay-for-Delete
Because of the downsides, Petersen says that some consumers are better off pursuing options other than pay-for-delete.
Dispute the error. If you have an account in collections because of an error, you certainly shouldn’t resort to requesting a pay-for-delete arrangement to get rid of it. You should dispute the error with each of the three credit bureaus. You can do this online or through certified mail. Once you submit a dispute, the credit bureau has 30 days to investigate your claim with the creditor. If it turns out there was indeed an error, the bureau is legally required to remove the entry from your report.
Request that the debt be verified. Under the Fair Debt Collection Practices Act, debt collectors are required to provide proof that you truly owe the debt in question. Within the first five days of contacting you, the collector must provide a debt validation letter, which will state your right to dispute the debt within 30 days. You must do so in writing. After that, the collector must then prove it owns the debt, you owe the debt, what you owe and other details. If the collection agency isn’t able to provide this information, you aren’t required to pay and could dispute the error to have it removed from your report.
Pay the bill, even without a pay-for-delete offer. If you are able to get a pay-for-delete from a collection agency, it may help your credit. But the delinquent account with the original creditor will still remain on your credit report. A collection account paid in full reflects better on your credit report. Plus, newer versions of the FICO and VantageScore credit scoring models only ding your credit for unpaid collections accounts. If you can afford to pay it, doing so could save you some hassle, especially if it’s the only collection account you have.
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Wait it out. Finally, you might want to think twice about requesting a pay-for-delete arrangement if the debt is older and you don’t plan on applying for new credit any time soon. “Consumers who offer a pay-for-delete have drawn the debt collector’s attention to their financial situation,” Petersen says. In other words, the debt collector now knows that you have the cash on hand to pay your debt. The collector might turn down your pay-for-delete request and instead ramp up efforts to collect what you owe.
“Some consumers should let sleeping dogs lie, especially if they do not plan to buy a house or a car in the immediate future, or if the charge-off is more than 3 years old,” Petersen says. The charge-off will age off your credit report after seven years.
Additionally, smaller debts tend to have less impact on your credit; amounts less than $100 may have no negative effect at all, depending on the scoring model. The same is true for certain types of medical debt. If this is the case, a pay-for-delete is probably not necessary.
However, keep in mind that just because a debt is removed from your credit report or doesn’t affect your credit score doesn’t remove any legal obligation to pay it.
Another important thing to keep in mind is that if the creditor or debt collector accepts a partial payment as payment in full (known as debt settlement), it is obligated to report it to the IRS as debt forgiveness if the forgiven amount is more than $600, according to Petersen. In most cases, forgiven debt is considered taxable income, which must be reported and paid in full that tax year.
In summary, pay-for-delete won’t harm your credit. However, it could be a time-consuming process that yields few results, if any. And as newer credit scoring models are adopted, the practice may become completely unnecessary.
More from U.S. News
Will Paying Off a Collection Account Improve Your Credit Score?
Paid in Full vs. Settled in Full: Which Is Best for Debt?
Will Pay-for-Delete Improve My Credit Score? originally appeared on usnews.com
Update 06/20/23:
