The Best Way to Pay Off Debt: 5 Precautions for Paying on a Negotiated Account

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” – Ogden Nash


It’s quite a feeling to pay down or pay off lingering credit card debt, especially after negotiating a high-balance account down to something that is more affordable. But before one rushes to pay on a “settled” account, among the best ways to pay off debt is by taking these five precautions:

  1. Beware of verbal agreements. Before paying on an account, have the credit card representative or collector email or mail a letter that specifies the terms of the account payoff. The settlement letter should be dated, signed by an identifiable representative, state a daily interest, and have an expiration date. It’s more than likely that without a written confirmation of payment terms, one’s payment will be applied to an account differently than what was intended.
  2. Have a third-party disburse funds. In instances involving a real estate closing, it’s best to present the title company or closing attorney with a written copy of the proposed negotiated loan payoff. Instead of paying the money directly to the creditor, have the closing agent disburse the appropriate funds to the creditor from the proceeds of the transaction. Otherwise, in some states, it could take up to 90 days before a creditor issues a receipt or releases a lien. When a closing agent disburses funds based upon the negotiated pay-off, the amount can be verified as paid on the closing paperwork.
  3. Always reference the account number. These days It’s common for people to have several credit accounts with the same creditor. So, when sending in a payment, put the corresponding account number on the check or attach a settlement check to the written payoff. When in doubt, write the intended purpose for a payment right on the check memo.
  4. Stick to the schedule. In circumstances where a debt modification or forbearance agreement is involved, stick to the payment schedule as agreed. Avoid sending lump-sum payments in advance, or monies that don’t match with the agreed-upon payments.  Forbearance and modification agreements, by their very nature, are exceptions to most lenders’ loan accounting systems and payments that don’t match a payment schedule will create confusion no matter how good the intentions.
  5. Follow-up and keep a receipt. Pull a credit report within a reasonable time after making final payments to confirm that the account is reported as “paid”, “settled for less than original balance,” or “closed”.

Most importantly, retain a copy of the payment receipt with the payoff letter and file it away for the future. Murphy’s law will be sure to work the day after a receipt is discarded. It’s best to keep the receipt until all three credit bureaus reflect a once-troubled account as “paid”.

About the Author: Since 1990, attorney David Soble has represented thousands of consumers and businesses in their finance and real estate matters.

Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own attorney.

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