Settled for Less Than Full Balance

If I settle an account for less than the full balance, will that harm my credit score?

If I ask my loan company that I have made all payments for four years on time, if I could negotiate settling for a lower amount than what is owed. Does it reflect negatively on my credit report?

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Updated: Sep 18, 2014

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An account marked as "Settled for less than full balance" will be a negative mark on your credit report, as explained below.

Settled for less than full balance

Many creditors will accept less than the full balance as payment-in-full. This is known as a settlement or resolution of the debt. However, you cannot simply ask the creditor to resolve or settle the debt for less than the full balance. To understand how to settle the debt for less than the full balance, we need to look an account from the creditor's perspective.

When a debtor stops paying on a debt, and the number of days since the most recent payment reaches 120 days, the account is no longer considered current, and the creditor is required to "write-off" the debt. Credit issuers are required to do this by the federal Office of the Comptroller of Currency, in an attempt to prevent banks from inflating future earnings statements with old and defaulted accounts. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease, or that the debt is forgiven. The write-off date has no legal significance, and almost nothing to do with the statute of limitations for debts.

At the write-off point, the creditor discounts the value of the account and will transfer it to a late-accounts department. This is where the synonymous terms "write-off" and "charge-off" come from. It also has the option to either assign or sell the debt to a collection agent. It is after write-off when debtors can start negotiations to pay less than full balance. However, keep in mind the collection agent has the right to collect the entire balance due plus interest.

Debt negotiation, also called debt settlement or debt resolution, is the process of negotiating with the creditor to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that is significantly lower than the total balance.

Keep the following five thoughts in mind should you choose to settle a debt for less than the full balance:

  1. The amount you can afford to pay. This should be a reasonable amount -- start with 40 cents on the dollar. Low-ball offers will be rejected immediately unless the debt is a second mortgage, which start at even less.
  2. Creditors are not required to negotiate. They often will, if the next option is bankruptcy, but do not expect them to make it easy for you.
  3. Negotiation is a process. When you negotiate, you make an offer and your arguments. Expect them to make a counter-offer and counter-arguments.
  4. You are negotiating with a person. If you are friendly and professional, they will be as well. Explain your situation in personal terms without becoming emotional. Listen to their arguments and answer them clearly. Your job is to convince them to see your side. Their job is to convince you to pay more. If you both play your roles properly, you will reach an agreeable settlement.
  5. Your credit score will suffer a setback. The creditor will almost certainly mark the account in question as delinquent during the 120-day period, and while in negotiations with the creditor. Once an agreement to resolve the debt is reached, the creditor will mark the account "Settled for Less Than Full Balance" or "Legally settled for less than full balance." This account will remain on your credit report for 7½ years after the date of first delinquency.

Debt settlement

To learn more about debt resolution including bankruptcy, read What Are My Debt Resolution Options?

One final thought: Although it might seem odd to pay a fee to save money, experienced debt negotiators will save you far more than the cost of their fee. They know which creditors are willing to negotiate and how much of a settlement they will accept. Due to their network of relationships, they can settle debts you could not on your own. Visit the Bills.com debt relief saving center to get no-cost, no-obligation quotes from pre-screened debt settlement service providers.

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

Best,

Bill

Bills.com

17 Comments

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  • KC
    Apr, 2014
    ks
    If I settle on a debt with a large bank such as Chase or Citibank, will it affect my ability to get a mortgage later on? I know that after 7.5 years it is erased from my credit score, but with banks having such large data bases now a days, I am afraid that the big bank companies will always have the ability to see that I settled a debt and may never give me a mortgage
    0 Votes

    • BA
      Apr, 2014
      Bill
      The fear you describe is reasonable and has a basis in law. There is no law saying if you default on a Bank XYZ loan, that bank must do business with you in the future. Bank XYZ can condition doing business with you on your repaying an old, delinquent loan, if it so wishes and it still has the right to collect the debt. (More on this ahead.) However, I think your fears are misplaced because banks are in the business to make money.

      It would almost certainly be illegal for the big banks to exchange "crabgrass lists" of customers who defaulted on loans. This type of information sharing, I would argue, would be illegal under federal anti-trust laws.

      It is more likely greed will prevail. I say this for two reasons.
      • The mortgage origination business is highly competitive. The mortgage divisions at the big banks hunger for the origination fees they can earn on your new loan.
      • If you defaulted on a home loan, investors lost money not a bank. Banks and other loan originators sell home loans several months after closing. Over the last 4 years or so, the biggest buyers have been Fannie Mae and Freddie Mac. National banks and other servicers are the face of your loan, but it is unlikely they invest in any home loans today.

      My point is, big banks do not have much on the line when it comes to individual mortgages. Chase or Citi don't lose money when a homeowner defaults on a mortgage — the loan's investors lose. It would be pointless for banks to hold hold a grudge if you defaulted on a home loan that's now off your credit reports.

      What if you default on a credit card, automobile loan, or personal loan? Typically, big banks sell their delinquent accounts to collection agents. When enough time passes, it is likely the defaulted account will not appear in the bank's computer database.

      What if the bank keeps records for a long time? The bank can refuse to do business with you. It cannot try to collect on debt it sold to a collection agent because it no longer has a right to collect the debt. If the bank refuses to do business with you, then it will lose the opportunity to earn a home loan origination fee. Given the choice between being spiteful or making money, the bank will choose making money.

      1 Votes

  • GP
    Sep, 2013
    Gary
    If a settlement was reached and it is reported on your credit report as a charge off and states "settled for less than full amount", can a collection agency still come after you to try to collect the rest of the amount?
    0 Votes

    • BA
      Sep, 2013
      Bill
      If an account was actually settled, then you should not pay anyone trying to collect on the debt, as you don't owe it any longer.

      What is noted on your credit report is less important than the correspondence you have from the creditor, as a credit report can be inaccurate. I hope you have a letter, email, or fax that outlined the settlement that you reached and that it stated that the payment you were sending brought the debt to $0 and closed out the account.
      0 Votes

  • EL
    Jun, 2013
    E
    My second home loan (chase) was charged off awhile ago (like last year sometime) and now we are talking about settling the account. My question is they are stating that it will be reported as "settled" and I haven't seen much info about a one word report like that and was wodering is that any different somehow? The other question i quess is with the impact to my credit report happening when we were behind and then probably again when they wrote it off, how much actual impact could them reporting it as "settled" now have?
    0 Votes

    • BA
      Jun, 2013
      Bill
      The "settled" notation is an indication to anyone who views your credit report that you did not pay everything that you owed, when you resolved your debt. That is fine. The savings you realize through a settlement are more important. As you stated, the damage to your credit from this account happened when the account went severely delinquent and was charged-off. Moving forward, just make sure to take the right steps to improve your credit score.
      0 Votes

  • KD
    Feb, 2012
    Karly
    I just settled a debit for "less than the full balance." it's fairly old from about four years ago, I was pretty young when it went into debt. I have my own car loan and all of my other bills I'm really good and never late. So this was the only thing that was haunting me. I am getting sick of having a bad credit score only causes of this. So I settled it For less than full. I'm just thinking about the future and getting married and don't want this to affect me. Is that good enough, should I have made payments for the full amount? Will it go off my credit after the full 7 1/2 years? Or do I have to ask them to take it off? And will my credit start to go up from here on out?
    0 Votes

    • BA
      Feb, 2012
      Bill
      The damage was done when the account became delinquent, and not not when you settled the debt. Concentrate now on good financial habits. Prepare a budget and pay your bills on time. Try to pay off your credit cards each month. Remember to monitor your credit report and credit score. It will improve with time.
      0 Votes

  • CC
    Oct, 2011
    Carlos
    I have quite a few debts that I have settled for less than the full balance. My question is will my credit score improve if I go back and pay the full amount?
    0 Votes

    • BA
      Oct, 2011
      Bill
      There is no definitive answer to your question, Carlos. It really depends on what kinds of accounts and the number of them that are reporting positive information to your credit report. It also depends on how old the accounts are that settled. If the accounts are old, I would not bother paying them off, but if you just reached settlements and can afford to pay them off and the slight improvement to your credit score is more important than the savings you realized in the settlements, then you may want to pay them off.
      0 Votes