How to Settle Debt with the Original Creditor

When a debt exists there are two parties involved – the creditor, who is the source of the loan, and the debtor, who is the receiver of the loan. If you are a debtor whose loan or credit card account goes into default, be prepared to face serious repercussions.

However, it’s never too late to get your payments back on track, and it’s much easier to accomplish when you’re dealing with the original creditor. In fact, you should try to avoid having your debts sold to a collection agency at all costs.

This one event can cause a ripple effect in many areas of your life, both financially and personally. Find out why it’s better to settle your debt before it goes to collections, and how exactly to negotiate with that original creditor.


Why should you avoid having your debt go to collections?

It’s better to deal directly with the original creditor than to have your debt sold to a collection agency. Collection agencies are often more aggressive in their collection attempts and may take extreme measures.

An “Original Creditor” is the first source of the money loaned. If the original creditor can’t get you as the debtor to pay your debt, they often turn the effort over to a collection agency.

In some cases, the original creditor sells the debt to a third party – a “Debt Buyer” – who pays them a percentage of the total debt to be collected. In most cases, debt buyers pay pennies on the dollar for the debt.

At that point, the debt buyer owns the debt and can then proceed to collect the full amount, plus fees, court costs, and interest. Typically, the debt collector can go to court with a lawsuit against you.

If you lose the case, you’ll receive a judgment, oftentimes for the highest amount possible. If you don’t pay the judgment right away, it could continue to accrue interest.

Eventually, you could also be subject to wage garnishment in order to have the judgment repaid. Plus, having either a collection or judgment (or worse, both) listed on your credit part can do lasting damage to your credit score.

Your best bet is to deal directly with the original creditor and avoid dealing with a collection agency altogether.

How do you know if your debt has been sent to collections?

Most debts are handled by the original creditor until they hit about 150 days of delinquency. If you’re only two or three months behind on your payments, chances are that your debt is still held by the creditor.

You should receive a letter in the mail warning you that your account is about to go into collections, so keep an eye out for any correspondence from your creditor.

Never throw any paperwork away, even if you’re dreading what may be inside. If you’re not sure if you’ve received a letter or not, call the creditor. Even if you’re at odds with them, they should be a trustworthy source of information regarding the status of your account.

If the creditor indicates that your account has already been sold, it’s important to contact the collection agency and ask them to verify the debt. This ensures that they haven’t resold your account elsewhere and that you’re negotiating with the right party.

Hopefully, though, your debt still resides with the original creditor and you can move forward with them in the settlement process. This is also why it’s important to stay on top of correspondence and not put off dealing with defaulted loans any longer than necessary.

How to Settle Your Debt with the Original Creditor

Before picking up the phone and asking to pay off your debt with a lesser amount out of good faith, have a strategic plan in place. Don’t be afraid to jot down some notes or talking points to have on hand. Ready for a strong negotiation plan? Let’s get started.

Know Your Financial Ability

If you’ve defaulted on your debt payments, chances are you’re having trouble with money. When negotiating with an original creditor, it’s important to know exactly what you can offer in advance.

For example, if the debt amount is $1,000 and you have $500 in hand with which to pay it, then it makes sense for you to make contact with that goal in mind.

It’s not a good idea to make any promises you know you can’t keep. Plus, a creditor is more likely to accept a lump sum payment over installments because it’s guaranteed cash for them. So it’s important to go into negotiations with your final number in mind and make sure it’s one you can actually hand over.

Exactly what percentage of your debt is a creditor be willing to settle for? The answer really depends on the each individual creditor. But one factor that is a major influencer is time. If a debt is newer, say 120 days old, the creditor will most likely want closer to the amount owed.

If a debt is older, such as 9 months old, the creditor will most likely accept a lower amount to settle the matter and get it off their books. Because of this fact, it’s helpful to do a little homework to determine what the creditor’s situation may be before attempting to settle the debt.

Handling Negotiations

Everyone knows it is best not to offer all you have to the creditor at the outset of negotiations because whatever amount is offered, there will no doubt be a counter-offer. This begins the process of negotiation. The process ends when an agreed-to amount is set.

While most creditors want a lump-sum payment over installments it is possible in some cases to establish an installment agreement. This is helpful in stopping the collection calls and keeps the creditor from initiating court action.

However, it’s also important to only agree to a payment plan that you can afford. Usually, if an installment agreement is established and you miss a payment, the full amount of the original debt (less any payments) will again become due. Remember, the creditor already has the experience of your failure to pay, and now they want to see a success.

Still, it’s important to protect yourself. If the original debt was agreed to be settled for a lesser amount, be sure to get an agreement in writing from the creditor. This is usually done prior to the exchange when you actually pay the debt.


To recap, the main action items for debtors who wish to settle their debt with the original creditor are:

  • Know your scope of your financial ability to repay
  • Make contact with the original creditor
  • Have money ready to make a lump sum payment
  • Negotiate with clarity
  • Fulfill all promises to the creditor
  • Get everything in writing BEFORE sending money

How does settled debt affect your credit?

Once you’ve settled your debt with the original creditor, your credit score will likely take a hit because the debt will be listed as “settled.” It’s still better than being defaulted or charged-off, but it’s something that future lenders can see — and could raise a red flag when considering your application for credit.

To avoid this scenario, use your credit report listing as part of the negotiation process, especially if you’re offering a large one-time payment.

As part of your agreement to pay, you can request the creditor to report the debt as “Paid As Agreed.” Even if you don’t end up successfully getting that listing, it’s worth a shot, and could even be used as further leverage during the negotiation process.

How else can you get help settling your debt?

If you’re not confident in your ability to handle the process and negotiate the debt settlement successfully on your own, you can hire an outside firm to do it for you. In general, it is best to utilize a debt settlement service with extensive experience in negotiations.

Credit counselors can help, as can professional settlement companies or even lawyers. The idea is to settle the debt for as little as possible so as to avoid a court action and the negative effects the information will have on your credit report and credit score.

Source: Lauren Ward []

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