Settlement options on an old card debt


Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

Ask a question.

'Credit Smart' archive


Dear Credit Smart,
Hi. I am considering doing a settlement with credit card company and wanted to see how that affects my credit. It's a closed credit card with a $5,547 balance. Company offered a principal payoff that would pay $5,347 and it would be considered paid. They would report it as paid – not paid partial or settled. Would this hurt my credit? They told me to ask credit companies but they didn't help either. – Brittany


Dear Brittany,
Your question has me a bit confused, because you say you are considering a settlement with a credit card company, but later you say that you were told to ask the credit companies and they couldn’t help you. This makes me think that the settlement you are considering is with a third-party debt settlement firm. First, let’s talk about the two kinds of settlements.

If I am wrong about where the settlement offer came from and it is from your credit card company, we are talking about a do-it-yourself option. Anyone considering debt settlement should know that a do-it-yourself approach may be the best option for settling a debt. You work directly with your creditor to come to terms to handle your debt.

Based on what you told me, they are offering to reduce your $5,547 principal balance by $200. That's not a large reduction, but the best thing about this deal is that they have agreed to report the balance paid in full and not as partial or settled. This is especially good for your credit, which is obviously important to you, since you asked if doing this would hurt your credit. 

You would likely owe taxes on the unpaid $200. Unless you meet one of the exceptions, any forgiven debt is considered taxable income by the IRS. You (and the Internal Revenue Service) won't get the usual 1099-C "cancellation of debt" form because the amount is below the $600 threshold that would trigger that report, but you'll owe it just the same.

Also know that if the account has gone unpaid and already been reported as late, paying it off will not immediately undo the credit score damage done by the late payments.

Another option for settlement is to go through a third party debt settlement firm. Using a third party firm is usually not a good option if you want to do the least amount of damage to your credit score. However, if you are not in the position to pay the $5,347 in full right now, this is an option available to you. Third party firms will usually offer payments that are less than you are paying now. You make those payments to the debt settlement firm, which it collects and holds while it negotiates with the creditor.

The problem is they may not pay your creditor until they have collected the entire amount due. This means that your creditor may not be paid for a significant period of time and that will certainly damage your credit score. In addition, you will likely have to endure collection calls from your creditor until the account is paid off.  If your offer came from a debt settlement firm and you do elect to go with this option, be sure to get the terms upfront in writing. This is especially important with regard to the notation to your credit report that the debt was not settled or paid partially.

You do have a third option, which is to work with a nonprofit credit counseling agency to enroll your account in a debt management plan. On a DMP, as they are known, you will pay back the entire balance due on your card so you won’t have to worry that the account will be reported as paid partially or settled. These agencies have arrangements with most creditors to lower the interest rate on the card, often at a lower payment, in order to pay off the debt in five years or less. The difference between a DMP and a third-party settlement is that the payments you make monthly to the agency will be sent to your creditor every month. With regular payments, the damage that has been done to your score from this closed credit card will recover over time. Of course, my recommendation for the best place to find an agency is to work with those affiliated with the NFCC.  There are others, as well, but whoever you choose, pick your credit counselor carefully.

Remember to always use your credit smarts.

See related: 6 tips for picking a credit counseling agency

Meet's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday,'s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Published: April 2, 2016

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Follow Us

Updated: 10-22-2016

Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.