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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Bill's Answer
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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

11 Comments

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  • 35x35
    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

    • 35x35
      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

  • 35x35
    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

    • 35x35
      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

  • 35x35
    Oct, 2011
    rumi
    I am negotiating a short sale of my home, but I'm keeping up with the mortgage payments so my credit won't be affected. We just accepted an offer from a buyer and have submitted all documents to the bank. My question is, can you negotiate with banks to report the short sale as "unrated" versus "paid in full for less than the full amount"?. Or if they have to report it as paid in full for less than full amount and I kept up with all mortgage payments until the short sale is approved will it adversely affect my credit score?
    0 Votes

    • 35x35
      Oct, 2011
      Bill
      Everything is open to negotiation in a short sale. The mortgage servicers can report the short sale as anything they want, providing the report is accurate. If the mortgage servicer replies, "We have to report it as such-and-such," that person is repeating a company policy, and not a law.
      0 Votes

  • 35x35
    Jun, 2011
    Undisclose
    The creditors don't usually want to remove the debts from the credit bureaus. So it will certainly be a negative on your account; however, you can get the settled account remove from your account by contacting the credit bureaus or pay as low as $50 a month to get them removed from your account within 4 months. Just type the related keywords on the web and you will find some of them. I won't mention any that I used in the past, because I am not here to advertise for them or doing review.
    0 Votes

  • 35x35
    Oct, 2010
    sylvia
    I make an settlement offer from bank (50% off from the balance). I will pay in 2 pyms. the account will appear like "settled in full for less than full balance" Will this affect me for 7.5 years on mycredit report? And after this pyms i need to to pay the other 50% from debt?
    1 Votes

    • 35x35
      Oct, 2010
      Bill
      You are asking me how your creditor will report your account to the three credit reporting agencies. I cannot answer that with certainty. I suggest you make this a point of your negotiations.
      0 Votes

  • 35x35
    Mar, 2010
    Bill
    See the Bills.com resource Reputable Debt Settlement to get three tips to help you choose an effective debt resolution provider.
    0 Votes

  • 35x35
    Mar, 2010
    p
    how can i check to see or know if a company is reputable for debt consolidation or debt management.
    0 Votes