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


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.


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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.
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2 thoughts on “What is the Damage to Our Credit Report if We Settle a Debt for Less Than the Full Amount? – Lara”

  1. 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.


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