Advice About Debt Settlement

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

I got an offer to pay my debt on a credit card. They said they will take off 40% of the debt, and consider it Paid In Full. Is it better to go ahead and pay the lesser amount, and have a Paid In Full noted on my credit report? Or should I arrange to make payments on the full amount? I want to do which ever will improve my credit score the most. I don't know if it'd be best to pay in full at a lesser value, or establish a payment history until I pay the entire amount.

Read full question
Bill's Answer
4.0
/5.0
(6 Votes)
Bills.com Team
Pro

By

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

VIDEO: Debt Settlement - What is Debt Settlement?

19 Comments

Recent Best
1500 characters remaining
  • 35x35
    Feb, 2010
    Bill
    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.
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    "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.
    0 Votes

  • 35x35
    Feb, 2010
    toya
    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?
    0 Votes

  • 35x35
    Jan, 2010
    Bill
    Read my answer to a fellow reader who had a similar question in "Served Summons and Complaint." This article discusses your options.
    0 Votes

  • 35x35
    Jan, 2010
    parkar
    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?
    0 Votes

  • 35x35
    Jul, 2009
    Bill
    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.
    0 Votes

  • 35x35
    Jul, 2009
    Matt
    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.
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    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/.
    0 Votes

  • 35x35
    Mar, 2009
    JANE
    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
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    I think you will find your answer here: http://www.bills.com/legacy-legal-services-credit-repair/
    0 Votes

  • 35x35
    Mar, 2009
    Barb
    Bill, thanks! One more thing: I have read about companies being able to repair bad credit. Are they legitimate? I would like to do something about my "over 90 day past due" on one credit card. Is there something I can do myself or are these agencies who say they can do something able to actually do that?
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    Sounds like a very sound strategy. Good luck Barb.
    0 Votes

  • 35x35
    Mar, 2009
    barb
    Thank you Bill. I have decided to pay in full as I do not want to risk my future with AMEX as you say I might, as I find it valuable in terms of benefits. I guess we don't exactly know what effects the settlement would have (esp. in the current climate) but I would rather not have the anxiety of risking it. Peace of mind is also important. And thanks for the advice that I could have negotiated more--as much as I loathe that banks are being hugely irresponsible (at least some CEOs taking money from taxpayers to get multi-million dollar bonuses, flying private jets, thowing super bowl parties, etc. all on OUR free taxpayer dollars)--I would rather just be an example of responsibility. I may be able to "get away" with saving money without negative ramifications to my other cards but I will choose to pay in full, owning my choices. I wish some bank CEOs would start acting appropriately! But anyway, Thanks Bill. I wish you a great day and lots of good fortune!
    0 Votes

  • 35x35
    Mar, 2009
    Barb
    Bill, I am so happy I found your website! I have to decide by tomorrow (Monday) what to do. Here is the situation. My credit card company (let's say BANK X) offered me a settlement of 15K instead of the 20K I owe. I am very concerned about affecting my relationship with my other cards (AMEX and another MASTERCARD BANK Z). I just got some money so I want to clean up all my debts (and not make any more debt). I will be paying my AMEX and MASTERCARD BANK Z in FULL. Regarding credit card company BANK X, I have NEVER missed a payment on 3 cards that add up to the 20K. Should I take the settlement or will the "settled for less/debt owed" on my credit report affect my relationship with AMEX and my other MASTERCARD BANK Z? The other thing that ticks me off is credit card company BANK X closed my accounts after I inquired about settlement (and if I am going to pay in full especially since I have never missed a payment I want to negotiate them to reinstate. I am an example of someone who the credit card company DID offer a settlement when I have always been current. I have NOT been current on my other MASTERCARD BANK Z so they maybe took that into account). Thank you I will check back and I appreciate your help. My goal is to move into the future wisely. I am grateful for your help.
    0 Votes

  • 35x35
    Mar, 2009
    Bill
    I would say first of all that a 75% settlement is relatively high. By hiring a firm or working harder you should be able to get that down to well below 75%, depending on how delinquent you are. You are correct, however, that a settlement for less than current balance will indeed impact your credit score and your other bank cards could be impacted by this (since they see your credit behavior on all of your cards). I hope this helps you a bit.
    0 Votes

  • 35x35
    Feb, 2009
    Bill
    First of all credit card companies will not settle on an account for which they are receiving payments on a monthly basis. Generally speaking, they give out settlements only to accounts that are having severe problems with the monthly payments, now I don't mean just a month or two behind, but persistent delayed payments. Even if the card issuer were willing to settle the accounts at this point, I am sure they will report it as an R9 charge off account that was settled for less than the due amount. Charge offs look very bad on your credit report and will affect your chances of getting credit in the future.
    0 Votes

  • 35x35
    Feb, 2009
    Tonya
    I have good credit and considered contacting the credit card company to settle the credit card ($10,000) for less in full. What would the impact be on my credit report if they are willing to do this?
    0 Votes

  • 35x35
    Jan, 2009
    Bill
    That is at the creditors discretion, and is not a hard and fast rule. Some of them will send it out, some will not. But here is deal, whether or not you are liable for those taxes really depends on your assets and liabilities. If the assets you hold are less than your liabilities, then you are most likely not liable to pay those taxes on the "forgiven debt".
    0 Votes

  • 35x35
    Jan, 2009
    Martin
    I was told by the credit card company that with a settlement payoff (over half taken off) that I would also have to file a form with the IRS stating that amount as income. Is that true?
    0 Votes