Writer: Gerri Detweiler
Editor: Jon McDonald
Reviewer: Ashley Fricker
In a Reddit thread I encountered recently, a debtor suggests that paying your creditors is a bad idea if you want to improve your credit. The Redditor wrote that they made a “crucial mistake” by paying their creditors versus letting accounts go to collections.
“It is 100000x easier to get collections and charge offs removed once they’re in the hands of a third party debt collector then it is trying to work with the original creditor,” they wrote in this post.
“The ONE account, out of the multiple accounts I had with late payments, that went to collections was by far the easiest to get removed from my credit report,” they added.
Responses to this strategy ranged from supportive to curious to adamantly opposed.
“This is such bad advice. It’s like ending up in the ER instead of your doctor because the ER has the MRI machine right there,” wrote another Redditor in response.
Is it really bad advice to stop paying your creditors? Good advice? Or something in between? Here we’ll explore how this approach stacks up against other options for dealing with debt and repairing your credit.
But first, some background on what happens if you don’t pay your debts.
What Happens When You Don’t Pay
When you stop paying a credit card or other debt you owe to a financial institution, the account will eventually be charged off. A charge-off simply indicates that the creditor is taking a loss on the debt. It doesn’t prevent future collection activities.
The credit damage can be significant. In addition to multiple late payments leading up to the charged off account, your credit reports will likely note the charge-off itself. A charge-off can appear on personal credit reports for seven years.
To put that in perspective, here are how long some other items can stick around on your credit reports:
| Item Type | Time on Credit Reports |
|---|---|
| Soft Credit Report Inquiry | No Report Impact |
| Hard Credit Report Inquiry | 2 Years |
| Delinquent Payment (30+ Days) | 7 Years |
| Vehicle Repossession | 7 Years |
| Defaulted Account | 7 Years |
| Foreclosure | 7 Years |
| Bankruptcy Discharge | 7-10 Years |
After a debt is charged off, the creditor will often place the debt with a collection agency that will, in turn, often report it to the major credit bureaus as a collection account. This can add another seriously negative item to your credit reports that can also be reported for up to seven years.
And there’s more bad news.
At any point in this process, you may be sued for the debt. If you fail to show up in court to respond to the lawsuit, or if you go to court and lose, the creditor will get a judgment against you. While judgments are no longer listed on consumer credit reports, they open the door to serious consequences.
The judgment creditor will often have access to additional ways to collect the debt; for example, by garnishing your wages or even seizing funds from a bank account, depending on state law.
Pay Or Don’t Pay: Which Is Better for Credit?
The Redditor making the argument for not paying debts was focused specifically on how it impacted their credit.
In their personal experience, they found it was easier to get a collection account removed from their credit reports than it was to get their creditors to remove late payments or charge-offs.
They may have a valid point there. “Pay-for-delete” deals, where you get the collection agency to stop reporting in exchange for payment, are not an uncommon scenario.
A few collection agencies have even formalized their pay-for-delete policies.
- Encore Capital (which includes subsidiaries Midland Capital Management, Midland Funding, Asset Acceptance, Atlantic Credit & Finance), won’t report collection accounts if you begin paying within six months and then pay on time. It also asks the credit bureaus to delete accounts that have been settled for less than the full amount or paid in full.
- Portfolio Recovery Associates will request deletion of collection accounts that have been paid in full or paid through a settlement agreement.
With collection agencies that don’t state these types of policies, the pay-for-delete strategy may require you to negotiate how much you’ll pay to resolve the debt, as well as whether they will remove it if you do. Your results may vary.
And unless you get that agreement in writing, which some debt collectors are reluctant to provide, you could even wind up paying a debt collector and then have trouble getting them to remove it from your credit reports.
Again, it often is harder to negotiate with creditors (like credit card issuers) to stop reporting late payments or a charged-off debt in exchange for payment than it is to haggle with debt collectors.
While you may have success getting a debt collector to stop reporting an account you’ve paid, they aren’t likely to have any control over how the original creditor reports the debt. In other words, even if you manage to get the collection account removed, the late payments and/or charge-off listed with the original debt will still appear on your credit reports.
| Timeline of Late Payment Impacts | ||
|---|---|---|
| 30-59 Days Late | 60-179 Days Late | 180+ Days Late |
| Bank will charge another late fee | Bank continues to charge late fees | Account closed |
| Penalty APR likely goes into effect | Your account may be closed | Debt sold to collections agency or other debt buyer |
| Account reported to the major credit bureaus as late | Accounts later than 90 days considered seriously delinquent | Bank may sue you |
| Your credit score will start to drop | Account may go to collections | Defaulted account remains on your credit report for seven years |
Some of the responses to this Redditor’s comments came from individuals who said they managed to get creditors to remove negative remarks using goodwill letters asking the creditor to stop reporting the account. Sometimes this approach works, but many times it does not. Again, your results may vary.
Taxes are another consequence to keep in mind if you negotiate lower payoffs on your accounts. In most cases, the IRS considers forgiven debt to be taxable income.
Let’s say you convince a collection agency to accept $500 as payment in full for a $1,500 debt, for example. The $1,000 they agree to write off is considered forgiven debt and they are required to file a 1099-C form with the IRS.
In turn, the IRS will expect you to include that amount in your taxable income unless you can demonstrate why it’s not taxable.
When It May Pay Not to Pay
For all the reasons above, it may seem that not paying your debts is spectacularly bad advice. But there are times when it may make sense.
First, it’s important to point out that when it comes to your credit scores, avoiding late payments and their consequences is one of the best strategies to protect your credit reports from years-long damage.
But if you can’t, there may be scenarios where you may need to think about ripping the Band-Aid off and no longer making payments. For example:
1. You can’t make your monthly payments: If you can’t make at least the minimum payments on your credit cards, or the required monthly payment on other debts like auto loans, your late payments will likely appear on your credit reports. Your credit scores will suffer, and the combination of late fees and high interest rates may make it even more difficult to get out of debt.
2. You can’t afford to pay off the full amount you owe: If you are continuously only making minimum payments on your credit cards or relying on credit cards to pay essential expenses, you may not see a way to get out of debt.
Either of these scenarios may be a sign you need to consider other solutions to deal with your debt, including credit counseling, debt settlement, or bankruptcy.
With debt settlement, you stop paying some or all of your debts. Once they go to collections, you may be able to negotiate to pay less than the full balance.
With bankruptcy, you may be able to eliminate some or all of your debt, depending on your specific situation.
If your debt is overwhelming, you may need to stop making payments, direct your money to essential expenses, and accept that your credit scores will suffer while you resolve your debt.
Before you default on your debt, though, it’s a good idea to get expert advice. A bankruptcy attorney can explain the consequences of not paying, including what might happen if you are sued for debts.
Once your bankruptcy is discharged (completed), you can begin to rebuild your credit with tools like secured credit cards. And you won’t have to worry about constant collection calls or the threat of lawsuits over unpaid debts if you just ghost your creditors.
The Verdict: Mostly Fiction With a Grain of Fact
Ultimately, this Redditor’s advice that you should stop paying your debts to make it easier to clean up your credit is based on one person’s limited experience. It has serious legal and financial consequences, including the risk of more credit damage.
If you’re finding it difficult to pay off your debt, evaluate all your options, including credit counseling, debt settlement, and even bankruptcy. Once you’ve tackled your debt, then you can focus on credit repair.
