Advice About Debt Settlement

How will a reduced debt settlement show up on my credit report?

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Bill's Answer: Answered by Mark Cappel

The answer to your question greatly depends on the amount of the debt in question, and how much money the settlement being offered will save you. If this is a $10,000 account, and settling the account will save you $4000 off the balance, I would encourage you to proceed with the settlement, as the small benefit you would receive on your credit rating is really not worth paying an extra $4000 to resolve the debt. However, if this is a $100 debt, meaning that the settlement will only save you $40, it would probably be worth it for you to go ahead and pay the full balance of the debt. If this account is already delinquent, which I assume it is, since the creditor is offering you a reduced balance settlement, the credit impact of resolving the account should be roughly the same regardless of whether you choose to settle the account or pay off the full balance.

Settling the account will likely result in an account status of “settled as agreed” or “settled for less than full balance” appearing on your credit report. These statuses are not generally as good as a “paid in full” status, but the difference is negligible, especially on an account that is already delinquent. The key thing that will help your credit report is resolving the delinquent debt so it will report a $0 balance on your credit report; how the account was resolved is not nearly as important, especially if the settlement will save you a significant amount of money.

If this account has reached a “charge off” status, you need to pay off this account as quickly as possible, as a charged off account appearing on your credit report can significantly lower your credit score. While setting up payments on the account may help you build a positive payment history on the account, a charge-off status will likely have a stronger negative influence than the payments would improve your score. If the account has not yet charged off, the creditor may be able to “re-age” the account, bringing the debt current and allowing you to continue making payments on the account. However, even if the creditor is willing to re-age the account and set up payments, you must consider that you will be paying interest on the account, probably at a very high interest rate, so paying off the account in this manner may cost you a lot more than settling the account now.

In my opinion, the best approach available in these circumstances is for you to settle this delinquent debt, and then open one or two new credit lines to begin building a positive payment history on your credit report. Use your new cards regularly, but make sure that you pay them off each month to avoid paying interest at the high rates charged by many credit card issuers. Taking these steps will provide you with the benefits and savings of a settlement while allowing you to continue building a positive credit history.

For more information about credit, credit reports, and credit scoring, I invite you to visit the Bills.com Credit Help page.

I wish you the best of luck in resolving this debt, and hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

www.bills.com

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Comments (19)


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Bills.com
February 20, 2010
Paying it off won't remove the chareoff, but having it settled or paid in full will be better than an open account that has been charged off (or R9 status). I'm not sure of your financial situation, but if that is your only bad mark on your credit profile and you are concerned about your credit soore, then definitely pay it off.
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Bills.com
February 20, 2010
"Charge off" does not mean the debt is forgiven. From a legal perspective, charge off means almost nothing to the debtor. See Charge-Off & Credit Report to learn more about charge off and your options for resolving the debt.
Toya .
February 20, 2010
I have a credit card that has been charged off. Should I offer to make payments on it so it would not mess my credit up or should I leave it alone it is around $550.00?
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Bills.com
January 12, 2010
Read my answer to a fellow reader who had a similar question in "Served Summons and Complaint." This article discusses your options.
Parkar .
January 12, 2010
amex sued me in TX for$ 14000,my hearing is on MON> jan 18 2009,what should I do? How can I buy time?After judgement what happened?
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Bills.com
July 23, 2009
It's tough to get your specific advice without really knowing what your full credit profile and credit score look like... but I can tell you that settling a debt will usually go on your credit report as "settled" or "settled in full" which is better than having an open and delinquent account, but worse than having an account with no delinquencies and paid in full status. I hope that helps.
Matt .
July 22, 2009
Hello Bill, My name is Matt and I have a situation. I owe on a couple of credit cards that have been sent to collection agencies. They are relatively small debts but I dont have much money. One agency offered me a deal paying 311.94 on 479.90. I dont think its been reported to the credit bureau yet. Should I pay the settlement or the full balance? Im trying to get my credit back into good standards the best I can.
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Bills.com
March 19, 2009
Jane - You could definitely do it yourself, but you will be looking at a lot of work ahead of you. With that amount of debt in question, I would lean on taking help from a professional debt settlement service. Here is an article that details the steps involved: http://www.bills.com/debt-negotiation-and-settlement/. If you are interested, we have done a review of a reputable settlement firm called Freedom Debt Relief, I suggest that you get a free savings quote from them as well. You can read the review here: http://www.bills.com/freedom-debt-relief/.
JANE .
March 19, 2009
BILL, I HAVE OVER 68,000.00 DOLLARS IN CREDIT CARD DEBT. MY QUESTION IS THIS AM I BETTER OFF TRYING TO CONTACT EACH OF MY CREDITORS DIRECTLY AND TRY AND SETTLE WITH THEM FOR A LESSER AMOUNT,BUT I DONT HAVE THE MONEY TO PAY THEM IN ONE LUMP SOME. CAN I ARRANGE TO MAKE PAYMENTS? OR AM I BETTER OFF GOING WITH A LEGITIMATE FIRM TO SETTLE? I HAVE NEVER BEEN LATE ON ANY OF MY PAYMENTS BUT IT IS TO THE POINT THAT MY HUSBAND AND I JUST ARE NOT MAKING THE MONEY WE USE TO AND WE JUST CANT DO IT ANYONE.. THANKS FOR YOUR HELP .JANE
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Bills.com
March 02, 2009
I think you will find your answer here: http://www.bills.com/legacy-legal-services-credit-repair/
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