Settled for Less Than Full Balance

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?

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

23 Comments

OOlivia, Jan, 2021

I just paid off my entire balance for a credit card that was in collections. I didn't settle for a lower amount than what I owed. Does it make a difference if the letter says "settled in full" or should I ask them to state "paid in full"?

JJoshua Abreu-Rosa, Aug, 2021

Oliva, 

Thank you for reaching out. Please, do not take my answer to be legal advice as I am not an attorney. Only attorneys can offer legal advice. 

It is always better to pay off your debt in full. While settling an account won't damage your credit as much as not paying at all, a status of "Settled" on your credit report is still considered negative. 

Settling debt means you have negotiated with the lender and they have agreed to accept less than the full amount owed as final payment on the account. 

I am assuming that you have stated you paid the full balance and never negotiated. If so you should request to update this error. Creditors are responsible for communicating to the bureau accurate information. 

Use this link to get started on disputing the error on your credit report. https://www.creditkarma.com/credit-cards/i/dispute-error-credit-report

Regards, Josh 

JJohnathan Newhile, Oct, 2020

I paid less than full amount and it went as a charge off on a credit card I had. If I were to go back to the debt collector and pay the rest of the amount off would they be able to update to possibly say paid in full? And would it affect my credit score? I am in the process of buying my first house and don't want anything to hold me back from that.

DDaniel Cohen, Oct, 2020

Jonathan, while the newer scoring models discount $0 balance accounts, if you are considering applying for a conventional mortgage, Fannie Mae and Freddie Mac use old FICO models that will factor the derogatory accounts on your report into your score. 

In your position, I would want to know what my current FICO score is for mortgages. I put that in italics because your mortgage FICO is different than other versions. If the removal of the account were of great value, either in terms of boosting your score to get a better rate or to qualfy for a mortgage, you could contact the collection agency and see if they would take payment for all or part of the balance for a pay for delete. That means you pay them and they agree to contact each of the bureaus to have the account deleted from your report. If they agree, get something in writing so it is clear what they will do when you make payment.

AApril, May, 2020

I just settled a debt for less than the original balance, but I was never late on a payment. The car was in an accident and no longer running. In addition, I lost income due to COVID-19. so they agreed to settle the debt. but I was never late on a payment. Will the tag "settled a debt for less than the original balance" still affect my credit negatively?

DDaniel Cohen, Jul, 2020

April, I can't give legal advice, as only an attorney can properly do so. Here are a couple of thoughts, with the understanding that I am not giving you legal advice.

I have heard anecdotal answers to your question but you can prove to be a documentary case if you share what happens to your credit score. My understanding is yes, any evidence of a debt that settled for less than the original balance is considered a derogatory mark by the credit score. The specific impact it has to your credit score will be dependent on other information on your credit report. ] If this auto trade line is the only credit obligation negatively reported, it could impact your credit score substantially.  You have much farther to fall if you have pristine credit than if you already have blemished credit. It is still a good thing that no late payments occurred; the hit your report will be far less severe than if you had a series of missed payments accompanying your settlement.

kks cow, Apr, 2014
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
BBill Admin, Apr, 2014
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.

GGary Palys, Sep, 2013
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?
BBill Admin, Sep, 2013
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.