Wondering if you should pay your debt in full or should offer to settle the debt? Here’s the skinny… If you have gone through the motions of disputing a debt and the dispute results come back verified and validated, the next step would be to figure out how you will pay the debt. When deciding whether you will pay collection item in full or simply settle, consider this:
When the debt reported as a collection or charge off, the damage was already done to your credit. With that being said, if you pay the debt in full or settle the account it looks better to a potential creditor because the bottom line is – THE DEBT IS PAID!
A creditor usually sells the debt to a debt collector for pennies on the dollar once the account is charged-off. With that being said, a debt collector may initially attempt to collect the full balance reporting, they are willing to accept less than the full balance owed. TAKE ADVANTAGE OF IT! You can initiate the negotiation by sending a ‘PAY FOR DELETE LETTER’ to the collector. I would recommend not offering more than 30% of the total balance.
WILL SETTLING THE DEBT FOR LESS THAN THE FULL BALANCE OWED HURT MY CREDIT SCORE?
As mentioned above, the damage was done to your score when it initially reported as a collection or charged off account. Paying the debt will only help in your future attempts to obtain credit.
HOW WILL THIS ACCOUNT REPORT ON MY CREDIT ONCE SETTLED?
You can negotiate with the collector to either delete the account completely off of your credit report once the agreement has been satisfied. If they tell you that the account can not or will not be deleted, it is not the end of the world. You can request that the account be updated to reflect that the debt has been ‘SATISFIED’ or ‘PAID AS AGREED’ and have all other negative remarks removed. Your score could possibly (emphasis on could) increase 1-5 points depending on the age of the debt. On the other hand, if you have a higher score, it may (emphasis on may) decrease your score. No one knows how settling a debt could impact your score because no one truly knows the algorithm used by FICO to determine the impact such action could have: good or bad.
Remember – banks, creditors, collection agencies, etc is required by law to report fair and accurate information regarding your payment history; be it good or bad. Therefore, if they do not agree to all of your terms, doesn’t mean that they are in violation, so long as the information they report once the settlement has been met reflects accurately. If you settle for less than the full balance owed and they in turn report the account as ‘PARTIALLY PAID/SETTLED’ then that would be accurate. That doesn’t mean that it will impact your score negatively and from a lending perspective, it’s better to see a debt partially paid than not at all.
Now the portion that was forgiven could result in your receiving a 1099 in which you will be required to file with your taxes as income. That could be the ‘penalty’ for settling the debt. Worst case, it could decrease the amount you receive on your income tax refund, but the flip side is, you have saved money by not paying the debt in full.
CAN THE ORIGINAL CREDITOR STILL REPORT THIS DEBT ONCE THE ACCOUNT IS SETTLED?
Unfortunately, yes. The OC can still report this account and any derogatory information for 7 years from the date of last activity. The information, such as balance, monthly payment amount and account status should be reporting accurately, but it can still report. The same is true for the debt collector as well.
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