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Settling Debt With A Creditor

This post is for those healthcare professionals who have debt that’s in collection and they are trying to figure out how to best deal with the debt. Settling debt with a creditor is a bit tricky and available information regarding debt settlement is meant to scare you rather than help you.

Types Of Debt In Collection

You’re not a deadbeat if you have debt that is in collection. Even if the debt collectors are trying to make you feel like a scoundrel, you simply weren’t taught proper bookkeeping skills which is why you have debt that’s in collection.

But hey, at least you were taught geometry … because without geometry you’d be a homeless person on the side of the street, shooting up crushed up vicodin tablets.

My belief is that as consumers we have a responsibility to pay back our debt because otherwise it’s stealing. But it’s not like we have to play the creditor’s games. If they decide to ruin our credit report or much less harass us then we have some tricks up our sleeves as well – such as the option of settling on the debt.

The most common debts placed in collection are:

  • health care bills
  • credit cards
  • department store credit
  • personal loans
  • mortgage debt
  • car loans

My Personal Debt Collector Story

I’ve had 2 debts go into collection. One was a health bill for $200 which UCLA charged me after an ER visit. I never received a bill for it or if I did it wasn’t clear that I owed money on it. This followed me for about 7 years. I paid the full amount instead of settling the debt – not smart.

The second bill collection was a $60,000 2nd mortgage on my primary residence that went into collection without the primary creditor telling me that it was going into collection. I settled this debt for $13k after receiving a bill for $85k.

Both instances ruined my credit from which I have recovered 100%. Both involved rude, harassing phone calls, and a lot of lies told to me by the parties involved.

Your Credit Is Already Tainted

If your account is in collection then understand that your credit report is already tainted. Don’t believe the bill collectors if they claim that they can ‘clean’ your credit report after you pay back the debt.

With this fact stashed, we can focus on what the bill collection process and use it to our advantage to clean up our debt and credit.

I believe that credit reports are held over our heads unnecessarily. They aren’t as important as you think and you can still obtain a loan even with poor credit. In my case, I obtained a mortgage for a new $500k condo within 2 years after settling on that mortgage debt above.

The Debt Collection Process

If you obtained your initial debt with one company, it’s quite likely that the issuing company then sold that credit to another company. That right there will already create a bit of a paperwork and tracking nightmares for you.

If you’re in good standing with your debt payments then you’ll deal with this 2nd company and all is gravy.

However, if you fall behind and fail to communicate or fail to meet the creditor’s requirements then your debt will be “written off” by the creditor and sold to a collection agency for $0.05-$0.20 per outstanding dollar.

My example: The $60,000 2nd mortgage was issued by company A, sold to company B to whom I made my payments on time for 2 years until I fell behind on payments (long story). The debt went into delinquency and was sold to company C which was a collection agency.

Price That Debt Collectors Pay For Your Debt

I was able to settle my debt at $0.21 on the dollar because the debt collector had likely purchased my delinquent loan from the initial creditor for $0.05 per outstanding dollar, or ~$3,000.

They send me a bill for $85,000 because of “late fees” and they followed that up with lots of scare tactics including foreclosing on me which they couldn’t do since it was no longer my primary mortgage. They told other lies as well but after my first rodeo with the medical bill collection process, I knew exactly what I was up against.

Settling Debt With A Creditor

It’s important to understand how little the debt collectors paid for your initial debt. Not to mention that the initial creditor gets to write off the loan  as a loss and thus gain a tax benefit.

20 cents for every outstanding dollar is where your negotiations should start.

If the debt collector doesn’t want to cooperate then just hold out longer. Let them continue to threaten to ruin your credit. Your debt will get passed from one individual to the next until you come across the right person who is willing to settle with you.

Make It A Juicy Offer

Don’t send them little tiny individual payments because that’s money you won’t be able to bargain with. But do stay in communication with them regularly and let them know what your situation is.

If you stay in touch with them then it’s more likely that they will move to make you a deal.

Next, save up enough cash and make them a one-time offer to settle the debt outright. Once you reach an agreement then get it in writing that they will mark on your credit report that you paid off the outstanding debt.

Then send the check in and get that letter they promised. If they fail to comply with their promise then at least you’ll have their letter in writing which you can give to a credit repair agency to clean up your credit report at a later time.

When Settling Debt Makes Sense

Settling debt makes sense when you can deal with the negative consequences on your credit report.


  • you’ll pay back less than you borrowed
  • you’ll get rid of your debt sooner
  • you’ll free up more money to invest/save
  • you’ll have one less thing to think/worry about
  • you won’t be contacted by a creditor


  • possible moral dilemma
  • adversely affect your credit report
  • tax consequences of debt cancellation
  • higher interest rates on future debt

Obtaining New Debt

You can have a terrible credit report and still get a mortgage as long as you can demonstrate to the bank that you are able to pay the money back.

However, settling debt can adversely affect your credit and therefore give the bank an excuse to charge you a higher interest rate.

Taxes on the Settled Debt

Settling debt at 20 cents on the dollar means that the outstanding amount will get written off by the creditor. You will still receive a 1099-C form from that creditor which shows the amount that was written off. This gets reported as income, on which you will owe taxes.

Moral Dilemma

The moral dilemma is an individual decision. I believe in paying back whatever I owe others, no matter how long it takes me. But the business of lending money is a business, after all.

I had no say in the terms of the debt because it’s a product that was sold to me. I chose to purchase it on mutual terms. And it’s on these mutual terms that I can decide on settling the debt if I am not longer able to pay it back.

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