Settling Debt

• Settling a debt is a legal process. You may prefer to deal with your creditors through letters. Creditors can sell you debt to a collection agency. The creditor gets the full loan amount returned using this option. Collection agencies are notorious for using illegal and unethical practices. Dealing with these entities through letters relieves you of the burden of dealing with them directly.
  
  

Settlement Process

• A settlement letter follows strict protocol. It is a professional document instead of a personal letter. The letter must clearly state the amount for which you wish to settle. Mention any prior interactions, whether in person or over the phone. Send the letter via certified mail, in case any complications arise. The creditor should send a settlement acceptance letter back via the mail confirming the settled amount and the agreed-upon consequences.
  
  

Charge-off Debt

• Charge-offs are more serious. A charge-off is essentially the same as a write-off. Creditors charge off debts when they have become noncollectable and no settlement is reached. The creditor's assets are exactly reduced by the charge-off amount. This hurts the creditor's profitability and impacts its future cash flow. Charge-offs are placed on your credit report, and have a serious negative effect. A charge-off entry remains on the report for seven years.
  
  

Handling Charge-offs

• It is better to avoid charge-offs than to attempt to have them removed from the credit report. Charge-offs are the biggest reason why new applications for credit are denied, according to the financial publisher Bankrate. Once a debt has been written off, it can still be paid by the debtor. After this, the entry on the credit report is changed to read "paid charge-off." This entry, while better than an unpaid charge-off, still negatively impacts the credit score. Contact the creditor to try to come to an understanding, preferably in writing prior to paying a charge-off.