Discounted PayoffCredit Repair Definition
An agreement where a lender accepts a lump-sum payment that is less than the full outstanding loan balance to settle the debt.
Definition
A discounted payoff (DPO) is a type of debt settlement where a lender or creditor agrees to accept a lump-sum payment from the borrower that is less than the total amount owed to fully satisfy the debt. This typically occurs when a borrower is significantly delinquent or facing financial hardship, and the lender determines that accepting a reduced payoff is preferable to pursuing costly collection efforts or risking receiving nothing. DPOs are common in situations like short sales (where a house is sold for less than the mortgage balance) or with unsecured debts like credit cards or personal loans that are in default. While a DPO resolves the debt, it usually has negative consequences for the borrower's credit score, as the account is reported as 'settled for less than the full amount.'
Frequently Asked Questions
How does a discounted payoff differ from paying the full balance?
Paying the full balance satisfies the debt completely and is generally viewed more favorably on credit reports (though the prior delinquency still hurts). A discounted payoff satisfies the debt for a lesser amount, but results in a 'settled' status on the credit report, which is negative. The forgiven portion of the debt may also be taxable income.
When are lenders most likely to agree to a discounted payoff?
Lenders are more likely to consider a DPO when: the debt is significantly delinquent (often charged-off or in collections), the borrower can demonstrate genuine financial hardship, the borrower can offer a substantial lump-sum payment (though less than the full balance), and the lender believes collecting the full amount is unlikely or too costly.
Should I use a debt settlement company to negotiate a discounted payoff?
While debt settlement companies specialize in negotiating DPOs, they often charge significant fees and may advise you to stop paying creditors, further damaging your credit. You can attempt to negotiate a DPO directly with the creditor or collection agency yourself. If considering a settlement company, research them thoroughly and understand the costs and risks involved.
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