Derogatory Credit Report Entry

Thank you for your question about paying off some old debt and how your credit report is affected by how the debt is reported.

Pay for Delete

The first, best option for you is to strive for a "pay for delete" in your negotiations with creditors. Savvy consumers pay delinquent debt with a condition -- deleting the derogatory entry from their credit report. A "pay for delete" letter, which is also known as a PFD, is an agreement to pay a debt that is listed on a credit report in exchange for the creditor promising to delete the entry from the consumer's credit reports.

Some collections agents will honor these agreements -- others consider them a breach of contract they have with the credit reporting agencies and will not consider them. Some use "PFDs violate federal law" as an excuse for not accepting them, which is either a misunderstanding of either the Federal Debt Collections Practices Act or Fair Credit Reporting Act, or is a misstatement of these laws. PFDs do not violate any federal law.

If you are about to to settle a debt you have nothing to lose in asking for a PFD. Do not be surprised if the creditor refuses to consider a PFD offer -- they are under no obligation to accept them. However, it does not hurt to ask. If the creditor agrees to a PFD, get this promise in writing.

Be Aware of Tax Obligations from Debt Forgiveness

Serious tax obligation can arise from forgiven debt. When you have debt forgiven, such as in a settlement with one of your creditors, you are likely to receive a 1099 for the amount of debt forgiven. You are required to declare the amount listed on the 1099 as income, which creates a tax obligation. It is possible that you may not have to declare the forgiven debt as income, if you meet the rules set out in IRS Form 982. Check with an accountant or qualified tax preparer to see if the Form 982 applies to you. The Form 982 is only eligible to be filed until October 15th of the year that the return was due, so make sure to discuss any forgiveness of debt you received with your tax professional, even if you do not receive a 1099. I have seen many cases of someone receiving the 1099 for forgiveness of debt after he or she is eligible to discharge the need to declare it as income with the Form 982. Sadly, the taxpayer is stuck with the tax debt if that happens.

Perhaps this does not need to be said, but the advantage of a PFD is that the derogatory account is erased from the consumer's credit file. If you have several strong accounts and one or two delinquent accounts that are removed with PFDs, you will see a boost to your credit score within 60-90 days.

Alternatives to PFD

You mentioned "paid as agreed" as an entry. There are alternative phrases as well. Unfortunately, all are euphemisms other creditors will read as "Didn't pay the full amount." All "paid as agreed"-like statements are red flags that the debtor did not fulfill their obligation to repay the entire balance due. However, these phrases are better than a delinquent or unpaid account entry.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com