Should I Make a Good Faith Payment to a Creditor?

When a creditor or collector asks you to send in a small amount of money on an unsecured debt you owe, such as a credit card debt, that's a good faith payment. The creditor or collector will probably say that making this payment shows you sincerely intend to resolve the debt. In many instances, the creditor or collector guilts the debtor into paying something (anything) toward the debt.

And, after talking to the creditor, you might think that paying a little bit will smooth things over and stave off collection efforts. However, making a partial or good faith payment doesn't mean the creditor or collector will go easier on you. In fact, it might have the opposite effect and other negative consequences.

What Is a Good Faith Payment?

In the context of debt collection, a "good faith payment" is a partial payment a debtor makes to show their intention to settle an outstanding debt. According to creditors and debt collectors, this payment indicates that the debtor is committed to addressing the debt, even if they can't pay the full payment or balance right away. It shows that the debtor is willing to cooperate.

A good faith payment is often made as part of negotiations to set up a payment plan or to temporarily prevent collection actions, such as a collection lawsuit. However, the two biggest problems with making a good faith payment are:

• You might reset the statute of limitations.
• Once a collector knows you'll pay something, they tend to think they can get you to pay more.

Also, if you pay less than the minimum, expect your creditor to charge you late fees, ding your credit, and eventually sue you for the entire amount you owe.

So, while you might think making a good faith payment shows your willingness to make good on a debt, taking this step can have risks and consequences. Before you make a good faith payment on a debt, carefully consider the implications of making the payment and whether it's in your best interests to do so.

Understand Your Creditor's Interests

It's important to realize that your creditor is only interested in making money and appearing profitable to its shareholders. When you pay less than your minimum payment, your creditor loses money, and frankly, shareholders don't like it when creditors have a lot of bad accounts on the books.

Creditor get rid of the bad accounts by selling them to debt collection agencies and then writing the losses off as a bad debt. Your credit report then shows the debt as "charged off."

Even so, in most cases you still must pay what you owe. Overall, however, throughout this process the creditor or debt collector doesn't care whether you're doing your financial best or not. Either you make your minimum payment, or the creditor or collector will attempt to make you do so.

Benefits of a Good Faith Payment

There are a couple of upsides to making a good faith payment on a debt. It shows the creditor that you're willing to pay the debt (rather than avoid it), which might prevent your relationship with the creditor from becoming adversarial.

Also, you might want to make a good faith payment to keep the creditor from charging off the debt, selling or assigning the debt to a collector, or suing you for the debt (at least temporarily). This tactic can buy you some time to negotiate a debt settlement or repayment plan before any of these things happen. And you can probably save money by settling directly with the creditor rather than dealing with a collector. You can also prevent a charge off entry from appearing on your credit reports.

If you decide to make a good faith payment, be sure to get the agreement in writing, understand the terms of what you're agreeing to, and use a secure payment method.

Negative Outcomes of a Good Faith Payment

While the creditor or collector might remain polite as long as you agree to a good faith payment, the simple fact is that the only way you can get in their good graces is by paying what you owe. If you can't, it's important to understand that making a good faith payment can be more harmful than you might think.

Partial Payment Often Has the Same Consequences As No Payment

In most situations, making a good faith payment is the same as making no payment.

• It hurts your credit. Paying only a part of your monthly payment means you still owe a balance the next month. After 30 days, your creditor reports the payment as late to the credit reporting agencies. For credit purposes, it is the same as not making a payment at all. Worse yet, your creditor will continue reporting late payments as long as you continue owing money.
• You get charged late fees. Not only do the payments stack up, but you'll also have to pay late fees if you make only a partial or good faith payment. As the fees add up each month, it gets harder to dig out of the hole of debt.
• You can still get sued. Once you miss all or a part of a payment, your creditor can sue you for the entire balance. Because your credit contract requires you to make monthly payments on a specific date, if you don't do so, you break or "breach" the contract and, in most cases, the creditor can accelerate the debt.

You Might Change the Creditor's or Collector's Attitude Toward You

After showing a creditor or collector you can pay something by making a good faith payment, they might become more aggressive in their collection tactics.

If a debt collector becomes more hostile when trying to collect from you, you should become familiar with the federal Fair Debt Collection Practices Act and any applicable state laws covering debt collection. The FDCPA (15 U.S.C. § 1692 and following) makes certain tactics that collection agencies commonly use illegal. You might be able to use any violations of the law as a defense in a collection lawsuit or as leverage in debt settlement negotiations.

Negative Impact on Your Negotiating Power

You've also potentially hurt your negotiating power by changing the way the debt collector views you and what they will accept as settlement. Debt collectors struggle to collect any money on their accounts. By the time your debt is referred to a collector, they know they might be lucky to collect pennies on the dollar. However, if you make a good faith payment, you're now a live account to them because you're willing to talk to them about paying. (You can refuse to talk to a collector and even request that they stop contacting you or limit how and when they can contact you.)

Making a good faith payment shows that you have money available, which can hurt your bargaining power if you want to try to settle the debt for less than you owe. You want the collector to think you have little money available and that it will be difficult for you to come up with a lump-sum amount when you're negotiating with them.

Why a Good Faith Payment Is Sometimes Worse Than Making No Payment: You Might Reset the Statute of Limitations

Sometimes, making a partial payment is worse than making no payment at all. That's because making a good faith payment can give your creditor more time to sue. Here's why: Your creditor only has a specific amount of time to sue you in court. This period, called the "statute of limitations," starts when you stop making payments and varies depending upon what state you live in. For example, in some states, the statute of limitations for a written contract is four years from when the contract was broken. So, a creditor must file a lawsuit within four years after you stop making payments.

If you make a payment after you haven't done so in a while, the statute of limitations might begin running all over again giving your creditor additional time to sue you. Even if the statute of limitations hasn't expired yet, if you make a good faith payment but then can't make further payments, you could have needlessly reset the statute of limitations, unnecessarily extending the amount of time the creditor can sue you for payment.

You also might not want to admit the debt is valid. By acknowledging the debt or making even a token payment, you might inadvertently restart the limitations period.

Alternatives to a Good Faith Payment

Before making a good faith payment, you should review your current financial situation, consider the age and validity of the debt, and your long-term financial goals.

Debt Validation

Before making any payments or offers to settle a debt, make sure that you actually owe it. Under the FDCPA, you have the right to require a debt collector to verify the amount and validity of the debt its trying to collect.

Consider Calling the Creditor

You might want to find out if your creditor has a program that will help get you back on your feet. Some creditors allow you to skip a few payments or lower your payment amount if you lose your job or experience an emergency. If the creditor offers you such a program, it is wise to get the terms in writing. Without it, a creditor might later deny entering into an agreement with you. While many creditors are reputable, the reality is that some collection departments try to get as much money from you as possible before they sue you for the entire balance.

Debt Settlement

Some debt settlement techniques you might consider are offering to pay less than you owe in a lump-sum payment or working out a repayment plan.

Debt Management Plans

Companies that offer debt management plans work with you and your creditors to develop a strategy to repay unsecured debts, like credit cards, medical debts, and other consumer debts. The most significant upside to a legitimate debt management plan is that creditors typically agree to waive some fees and reduce interest rates as part of the program.

Unfortunately, it's easy to fall into a debt management scam, sign up for services you really don't need, or end up paying money to a disreputable agency that could otherwise go directly to your creditors.

Should You File Bankruptcy?

If you can't bring your balance current soon, making a good faith payment could be an exercise in throwing good money after bad. Instead, it might be a better idea to find out if you qualify for bankruptcy. If you do, the cost of filing might be offset by the fact that you can discharge many, if not all, of your other debts as well.

Ignoring the Debt

If you're judgment proof, you might consider ignoring the debt. However, being judgment proof is, in some cases, only a temporary condition.

Also, if a creditor sues you and you believe you're judgment proof, it's usually a good idea to respond to the lawsuit anyway. You might have a valid defense to the suit, like the statute of limitations has expired.

Getting Help With Debt Repayment

If you have a complaint about a creditor or debt collector, you can file a complaint with the Consumer Financial Protection Bureau.

To get help with managing your finances, consider talking to a debt counseling service. To find a reputable nonprofit credit counseling agency, look for a company that's accredited, usually by the Council on Accreditation (COA) or the International Organization for Standardization (ISO). Consider using an agency that's a National Foundation for Credit Counseling (NFCC) member accredited by the COA. Don't hire a for-profit debt relief company.

If you need help responding to a debt collection lawsuit (or if you want to file a suit against a creditor or collector), talk to a debt relief attorney. To learn more about whether filing for bankruptcy might be a good option for you, talk to a bankruptcy lawyer. If you can't afford a lawyer, a legal aid organization might be able to help you. You can find a list of various legal aid programs near you on the Legal Service Corporation's website.

For information on managing your debt, get Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo). For comprehensive information on how to repair your credit, get Credit Repair, by Amy Loftsgordon and Cara O'Neill (Nolo).