Key Takeaways

Debt validation and debt settlement are two different ways of managing your debt. Debt validation involves verifying if the debt is yours, while debt settlement is about negotiating with your lender to settle your account for less than you owe. Learn the difference between the two to decide which one is right for you.

There are several different ways to manage your debt, such as debt consolidation, debt management plans, debt settlement, and debt validation. When deciding between debt validation vs. debt settlement, it’s important to learn more about how each of these works, what they can help you achieve, and their benefits and drawbacks so you can pick a solution that works for your financial situation.  

Definition of Debt Validation

Debt validation is a process that involves forcing a collection agency to prove that you owe a debt. Debt validation is every borrower’s federal right under the Fair Debt Collection Practices Act. And to do this, you’ll need to send a written request within 30 days once a collection agency contacts you.

Debt Validation Techniques

There are two main techniques involved in the debt validation process, debt validation and debt verification or debt dispute. As a borrower, you can ask a collection agency to send you a debt validation letter to prove that a debt exists.

Once the collection agency sends you a debt validation letter, you can then send a debt verification or debt dispute letter to challenge the existence or details of a debt. The terms debt validation and debt verification are often used interchangeably, but they are different.

Debt Validation Process

When a collection agency contacts you, you must send them a written request for debt validation within 30 days. The first communication from a collection must include the amount you owe and other important information about your debt. They must also inform you in writing about your debt validation rights within five days of the initial communication.

Once you send a validation request, the collection agency must send you a written debt validation notice which includes the information listed below:

  • The name of the lender
  • Amount owed
  • That you can dispute the debt within 30 days, or the debt will be considered valid
  • That you can request the name and address of the original lender within 30 days
  • That the debt collection will offer verification of the debt if you dispute the debt within 30 days

Once you send a request, the collector must stop all collection attempts, such as letters, phone calls, and reporting the debt to credit bureaus until they respond to the dispute.

Definition of Debt Settlement

Debt settlement is the process of negotiating with lenders to reduce your debt. When settling a debt, you work with your lender to come to an agreement about resolving your debt for less than the original amount you owed. If you have missed several payments and the lender feels that they may not be able to recover the amount you owe, they may be willing to negotiate with you.

Debt Settlement Strategies

When settling credit card debt or any other type of unsecured consumer debt, you have two main options. You can either negotiate with the credit card company yourself or work with a professional. Regardless of the option you choose, the most important strategy that will determine your success is negotiation.

Debt settlement professionals are skilled negotiators, so they may be able to get you a better deal. Additionally, they are also strategic about what settlement amount to offer to which lender. Their experience in the industry gives them a better understanding of which lenders may be likely to accept a settlement offer.

Debt Settlement Process

The exact settlement process will depend on whether you plan to negotiate debt yourself or through a debt relief company. Here are the basic steps involved in the process:

  • If you are negotiating credit card debt or any other debt yourself, you’ll need to reach out to your lenders to explain your financial situation.
  • Send them an offer in writing to settle your account for less than you owe, accept a payment plan, or reduce your interest rate.
  • Continue to make payments until you reach an agreement.
  • If you’re working with a debt settlement attorney or a settlement company, you’ll need to stop making monthly payments to lenders.
  • A separate bank account will be set up for you where you’ll need to make deposits to accumulate funds that will go towards the settlement.
  • When you reach a settlement, the settlement company will pay a lump sum amount from the savings account to your lender. The lender will forgive the remaining debt.

Differences between Debt Validation Vs. Debt Settlement

Now that you have a deeper understanding of how these processes work, it’s time to look into the differences between them. Read on to learn more about the pros and cons of debt validation vs. debt settlement.

Benefits of Debt Validation

  • When you send a debt validation letter, you establish an affirmative defense against the collection agency. Without it, the collection agency will have more leeway to collect the debt or file a lawsuit against you.
  • Debt validation involves low risk. Every consumer has a right to dispute a debt before they decide to pay it off.
  • The collection agency can’t continue collection efforts until they send you adequate verification of the debt.
  • If the collection agency can’t verify the debt, you may not have to pay it off.
  • Debt validation is free and easy to do on your own. You can write the letter yourself with the help of a debt validation letter template, which is available online easily.
  • Once you verify the balance of your debt is correct, you know how much you owe and can pay it.

Benefits of Debt Settlement

  • Debt settlement can help you save money by lowering the total amount of your outstanding debt.
  • It can help you get out of debt sooner. With a settlement, you’ll have to pay a lower amount overall, so you may be able to pay it off earlier.
  • When you work with a debt relief company, you won’t need to communicate with lenders yourself.
  • You will have structure and an effective plan to pay off your debt. The debt settlement company will set up a separate account for you and help you come up with a plan so you can start saving money for a lump sum payment to use toward your settlement.
  • Debt settlement may help you avoid bankruptcy. If you’re overwhelmed with debt without many options to pay it off, debt settlement may help you get back on track and avoid the devastating effects of bankruptcy.  

Drawbacks of Debt Validation

  • If the original creditor assigns the debt to a collection agency and they can’t send you validation as per your request, the collection agency will usually give the debt back to the original lender. The original lender will then try to collect themselves, sell it, or assign it to a new collection agency.
  • You may have to repeat this process with each new collection agency that the debt may be assigned or sold.
  • Debt validation cannot be used with the original lender.
  • If a collection agency offers adequate proof to verify the debt, they may send summons for judgment.

Drawbacks of Debt Settlement

  • Debt settlement doesn’t eliminate the possibility of a collection lawsuit. The lender may decide to sue while the account is with a settlement company.
  • Debt settlement can lower your credit score. You’ll typically need to stop making payments to the lender to be able to settle your account. Once you settle your account, the lender may report it as a settlement, which may also hurt your credit.
  • You’ll owe taxes on the forgiven amount to the IRS.

Choosing Between Debt Validation Vs. Debt Settlement

Debt validation and debt settlement are both valid and effective options that can help you manage your debt. Choosing between the two will depend on your individual financial situation. That said, there are a few factors you may want to consider when deciding which route is best for you.

Factors to Consider

When choosing between debt validation vs. debt settlement, start by taking a full inventory of your current financial circumstances. Make a list of all debts you owe, how much you owe, if you’re currently making payments, and if your debt is with the original creditor or is sold.

If your debt is with a collection agency, debt validation may be a good option for you. This is also a good option if you think you’ve already paid the debt or if you’re not sure it belongs to you. When a collection agency purchases a debt, it may not always have accurate information. Debt validation can help you validate the debt, reduce it, or even eliminate it if the collection agency can’t adequately prove the debt.

If you have missed multiple payments on your debt, you may want to consider debt settlement. Your lender may see that you’re not likely to pay your account in full, and they may be willing to settle the account for less than you owe.

Depending on which situation you find yourself in, debt settlement or debt validation may be a good way to find a resolution for your debt.  

Before you choose between debt validation vs. debt settlement programs, it’s important to learn more about the legal implications of both and your rights as a consumer. The Fair Debt Collection Practices Act (FDCPA) provides you with the legal basis for debt validation. The act also protects you against unlawful collection practices.

Another important point to note here is that when you request validation on an old debt, you are acknowledging the debt. This may reset the clock on the statute of limitations. If your debt has already expired or is about to expire, you may not want to request validation.

When it comes to debt settlement services, a legal implication to be mindful of is that a lender may choose to file a lawsuit even while you are negotiating a settlement. Be sure to consult a lawyer and respond to any notices you receive.  

Reviews and Recommendations for Choosing Companies

Although you can do debt validation and debt settlement yourself, working with professionals is highly recommended if you want the process to be stress-free and effective. Choosing between debt validation vs. debt settlement companies will depend on which option is right for your situation.

In many cases, it may be better to use debt validation in combination with settlement to receive more settlement offers. Law firms that are well-versed in debt invalidation techniques and consumer protection laws usually offer debt validation services. If you opt for debt settlement, choose to go with a reliable and experienced company like TurboDebt.

Criteria for Evaluating Companies

Regardless of the debt relief option you choose, you want to choose a company that is transparent with its clients about their fees and process. You also want to work with a company that knows how to get you results. If the company offers a free consultation, take advantage of it by asking questions about how they work and what you can expect if you sign up.

Check the reviews of the company on websites like Trustpilot, Google, and Better Business Bureau to see what their past clients have to say about them.

Impact on Credit Score and Credit Report

With debt validation, it’s important to remember that debt collectors can report the debt to credit bureaus. However, they cannot report any false information. When you dispute your debt, they must inform credit bureaus about the dispute.

Until the collection agency can validate the debt, they cannot report it to the credit bureaus, so the debt won’t impact your credit score. It’s recommended that when you send a debt validation letter to a collection agency, you should also send a dispute letter to all three credit reporting bureaus to protect your credit score.

Going through debt settlement can impact your credit score. For instance, you’ll need to stop making payments during negotiations, and this will lower your credit score. Once you make the lump sum settlement payment, the account may be marked as “settled,” and this can also hurt your credit. An important point to note here is that debt settlement is usually a good option for borrowers who have already missed a few payments and have, therefore, already hurt their credit score.  

The Bottom Line

Owing money to creditors can be stressful, but there are federal laws in place and organizations like the Consumer Financial Protection Bureau to protect you from unlawful collection practices. You also have access to many options to resolve your debt and live a debt-free life. Debt validation forces a collection agency to prove that you owe the debt, which is a right every consumer has.

Debt settlement can help you negotiate with your lender and settle your account for less, potentially saving you thousands of dollars. TurboDebt can help you navigate the debt settlement process in a stress-free manner. Get in touch with us for a free consultation today.