Debt forgiven? Your creditor may still come knocking
CBS News says written settlement deals usually stick, but missed payments, bad records or unfinished paperwork can put borrowers back in the collection spotlight.
By Sal Moretti · Money Reporter
3 min read
A creditor generally cannot erase part of your debt in a deal, watch you meet every term, then stroll back later and demand the rest, according to CBS News.
That is the good news for borrowers trying to settle balances at a moment when household debt has reached a record high and average credit card interest rates remain near 22%, CBS News reported. Many consumers are trying to cut what they owe by negotiating with creditors directly or using debt relief companies to settle accounts for less than the full balance.
The catch is that debt forgiveness depends on the deal actually being finished, documented and honored by both sides. CBS News reported that a written agreement saying the creditor will accept a smaller amount as payment in full is usually enough to close the matter if the borrower completes every required step.
If that happens, the remaining balance is generally resolved under the settlement contract, according to the report. Problems tend to appear when the paper trail is thin, payments are missed or the account changes hands.
When a forgiven debt can come back
CBS News identified several situations that can make an old balance resurface. The most obvious is an incomplete settlement. Debt settlements often require a lump-sum payment or a set schedule of payments. If the borrower skips a payment or fails to satisfy another condition, the deal may be void.
In that case, CBS News reported, the creditor may be able to pursue the original amount, plus interest or fees allowed by the agreement and state law.
Loose documentation is another danger zone. A verbal promise from a creditor can be hard to prove later. CBS News said debt relief experts generally advise borrowers to get written confirmation before sending settlement money.
That settlement letter should spell out the amount the creditor is accepting, whether that amount satisfies the full debt and what happens after the payment is received, according to the report.
Debt buyers can muddy the water
Settled debts can also be sold because of administrative mistakes or stale account records, CBS News reported. If a debt buyer receives bad information, it may try to collect on a balance that should already be gone.
That does not necessarily mean the original creditor reversed the deal, according to CBS News. It can still leave the borrower needing to prove the settlement happened. Copies of the agreement, payment confirmations and correspondence can help clear up the dispute.
Timing matters too. CBS News reported that if an account is sold before a forgiveness agreement is fully completed, the new owner of the debt may not be bound by discussions with the original creditor. A verbal understanding can lose its value if the account changes owners before the paperwork is done.
Errors and fraud can change the outcome
CBS News said fraud or intentional misrepresentation can also threaten a settlement, though those cases are uncommon. If false information materially affected the agreement, the creditor may have legal grounds to challenge it.
Clerical mistakes can create another mess. A creditor may forgive the wrong account, misread an offer or process a write-off meant for someone else, according to CBS News. In some cases, the creditor may be able to reverse the forgiveness, but borrowers can ask for documentation explaining why the reversal happened.
The practical takeaway from CBS News is blunt: debt forgiveness is strongest when it is written, signed, completed exactly as required and made with the creditor that still owns the account. Borrowers should keep the paperwork even after the balance appears closed.
This story draws on original reporting from CBS News.