Should I continue on this debt repayment plan with a 4th party?

May 8, 2012 7:55 PM

I defaulted on my student loan and entered into an agreement with a third-party debt collector to repay. That loan has now been "transferred" to another agency that seems to be pretty sleazy, although I've been assured by my original lender that this new company will honor the terms of the agreement I had with the first collection agency. Is this my best option, or should I be doing something else?

tl;dr without the tale of woe: Let private student loans go into default, set up a repayment plan with third-party debt collector. Saving a considerable amount of money through this plan but will have the loan listed as "in default" on my credit report until I'm done paying it off in 9 years. Now this debt has been sold to another debt collector with a very sleazy reputation. Should I continue with this plan, or are there better options I should look into?

Here's the story, and yes, it involves me being very dumb/irresponsible about money and my financial obligations. I completely realize that this is all my fault and I am definitely not trying to get out of paying my debts. However, I want to try to do so in a way that minimizes the further damage to my credit.

I graduated from an advanced degree program 5 years ago, with the typical variety of federal and private loans. I had a really hard time for the first 2-3 years both financially and health-wise and let my private loans (with a bank I'll call Megabank) go into default (my federal loans were in forbearance). Once they went into default, they got bought by a third-party, Debt Collector 1, who called me at my place of employment and set up a repayment plan with me (with no small amount of intimidation and threats of lawsuits, but that's another story).

I was really pretty wracked with guilt and shame about the whole thing, so I entered into the payment plan without really exploring my options. It actually seemed like a fairly decent deal at the time - because the debt has been written off, no new interest is accruing, which saves me about 40% over the lifetime of the loan. I would make a monthly payment for 10 years and then the debt would be paid off.

BUT. The big drawback is that the loan will appear as "in default" on my credit report until it is paid off. When I made this deal a year ago, I knew that could be trouble, but again, I was full of guilt and shame and just figured I deserved it. But now I'm in a much better place emotionally and financially, and I'm really getting my financial house in order (set up electronic bill-pay for most of my bills, paid off my credit card balances, carrying a decent balance on my checking and savings accounts, making regular, on-time payments on my car and other student loans, etc). Pretty soon, this will actually be the only current black mark on my credit history.

And then the most recent wrinkle: my loan was sold off, en masse with a bunch of other loans, in a "quick transfer" to Debt Collector 2. I haven't actually heard from Debt Collector 2 yet - I found this out by noticing my checking account hadn't been debited for the last two months, and calling first Debt Collector 1 and Megabank to find out why. Megabank has assured me that Debt Collector 2 will honor the terms of my agreement with Debt Collector 1. But I've done a bit of research on Debt Collector 2 and they seem beyond shady (for instance, trying to "collect" on fake debt from the relatives of recently deceased people) so I really do not trust that they will.

And I'm staring down 9 more years of having DEFAULT on my credit history, and I'm wondering if I have any other options. Should I try to negotiate with the company that now owns my loan? I'm not sure what I have to offer them or what they could or would do. I know most experts say not to deal with these third party debt collectors, but what are my other options?

Is continuing to pay this debt collector my best option, or are there alternatives I should consider?

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posted by anonymous to Work & Money (4 answers total)

If you have the capacity, often these agencies will accept a cash settlement for less (sometimes a lot less) than the total amount owing. Ask them if they are prepared to do so and, if so, for how much. For a debt that will span another 9 years with no interest, it would be worth their while to give a substantial reduction to get the money now.

If you do, make sure that you have formal acknowledgement that the payment is full and final settlement of the debt, just in case.
posted by dg at 8:18 PM on May 8, 2012 [2 favorites]

You should contact Debt Collector 2 to renegotiate the deal. Part of how the entropy of the system works is that every time a debt is transferred it is worth less as the likelihood of full repayment goes down. You will likely be able to negotiate a more favorable deal, rather than have to suffer a less favorable one so long as you play your cards right.
posted by Blasdelb at 9:13 PM on May 8, 2012 [2 favorites]

Per both above, cry poormouth at them and see what kind of settlement you can get. I don't know how the current brou-haha over student loans will affect the answers you get, but, y'know, the collection agency isn't going to know how much you're making HINT HINT.
posted by rhizome at 12:07 AM on May 9, 2012

Are you aware of loan rehabilitation? It's a one time only thing you can do with a defaulted student loan. ANd once you ask for it, as I understand it, it has to be given to you. Basically you're given a payment that you MUST make for one year. If you do, your loan is considered rehabilitated and it goes back to the original terms of your student loan.

I did it a few years back on a loan that had been in default for 10 years. What's funny is once it's restored to regular status it actually converts to a listing on your credit report as having been in GOOD status for that same amount of time. My credit score went up 100 points once it rehabilitated.
posted by rileyray3000 at 6:22 AM on May 9, 2012