Latest Posts
Home > Ask The Get Out of Debt Experts > What is the Damage to Our Credit Report if We Settle a Debt for Less Than the Full Amount? – Lara

What is the Damage to Our Credit Report if We Settle a Debt for Less Than the Full Amount? – Lara

Lara

“Dear Steve,

My husband and I have over $45,000 credit card debt. Our income has been seriously reduced by about 65% lately. We are thinking of best ways to reduce debt amount or get payment plans over a period of 5 years. If the creditor decides to accept to settle the debt for less it will appear as settled in full in our credit report

What’s the effect of having the note “”Settled in full “” in our credit report? Is this the best way out of our problem?

Lara”

Don’t miss our free Get Out of Debt – “How To” Guide Series on a number of topics, for loads of practical advice, tips, and help to beat back debt. – Click Here

The Answer

 

Dear Lara,

Debt settlement is not a magic solution. There are consequences.

But debt settlement can be an effective way to clear you debt without bankruptcy if you have the cash on hand to pay the settlements right away and you are prepared for the problems to come.

There are some pretty serious consequences to settling debts. If a creditor agrees to reduce the amount you owe by 40% and you pay the remaining 60% off it will still hurt your credit report. The 40% of debt forgiven will show as written off to profit and loss. It is a bad mark, while the 60% you paid may be reported as paid in full or satisfied.

Additionally, you will be required to pay income tax on the 40% of debt forgiven, just like you got that money in your paycheck. Yes, the IRS is going to tax you on money that you don’t have and could not pay. Forgiven debt is treated as income.

Settling debts will still hurt your credit and creditors are required to show that forgiven debt as a bad mark on your credit report. Creditors are under contractual obligations with the credit bureaus to report true and accurate information.

Look, creditors won’t lie for you but they often do lie to you and say that the account will be reported as paid as agreed if the partial payment is made. They just don’t volunteer the rest of the statement about reporting the written off debt or telling the IRS. As one creditor told me when I confronted him with the tax implications, “Steve I’m in charge of collections, not giving tax advice.”

Frankly, with such a large reduction in income I’m not confident that any repayment plan is going to be sustainable for you. Making promises to pay that you won’t be able to follow through on is pointless and can hurt you more. Focus on replacing as much of the missing income as possible. If you can then maybe a debt management program is a consideration. If you can’t, you’ll probably have to meet with a local bankruptcy attorney for a free bankruptcy consultation and evaluate if bankruptcy is right for you.

Big Hug!

What is the Damage to Our Credit Report if We Settle a Debt for Less Than the Full Amount?   Lara
Get Out of Debt Guy – Twitter, G+, Facebook

What is the Damage to Our Credit Report if We Settle a Debt for Less Than the Full Amount? - Lara by

Share This and Spread the Word

About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • http://[email protected] george

    Just came across the blog. I disagree with the bankruptcy answer. Debt settlement is the best alternative to bankruptcy and is much more favorable. Most bankruptcies these days are done chapter 13 in which you are still required to pay back some if not most of the debts included. Beyond that BK stays w. you for 10 years plus the attys fees. Debt settlement can often be done for much less than half the ballance including settlement companies fees. I am not an attorney or an accountant but am in the debt settlement business and I can tell you that it is rare that the irs comes into play, however possible. Any canidate for debt settlement normally does not care too much about their credit score due to the fact that is most likely already in the dumps (below 600). Debt settlement will allow you to become debt free in a timely fassion, when complete a good credit repair company can do amazing things with your score, also you are now debt free and possible even creating a savings. You may even feel heavy in cash and credit may not be necessary.

  • http://personaldebtcoach.com/what-is-debt-settlement/ Personal Debt Coach

    Steve, I think your answer is a good one. It is also important to mention that the best route (if you decide to settle your debts); it to do it on your own. Debt Settlement firms can often have HUGE fees associated with them. I recently wrote a blog post on this. Thanks!

    Personal Debt Coachs last blog post..What is Debt Settlement?

Get My FREE Get Out of Debt Guy Newsletter

It is the smart thing to do.

I promise to keep your email safe and secure.

Close

I want to keep you posted each weekday with just one email about the latest get out of debt news, scam alerts and information to beat back debt.

You can unsubscribe at any time with just one click.

After you subscribe, check your email to confirm your subscription. If the confirmation email does not appear in your inbox in a few minutes, check your spam folder for it. Sometimes it likes to annoyingly hide there.


  • It will keep you posted on the latest scams.
  • You will be alerted to the latest articles.
  • You will wind up smarter than everyone else dealing with debt.