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Q&A: Should I take offer to settle my card debt?

Find a way to pay in full instead; the settlement will hurt your score further

By  |  Published: July 8, 2017

The Credit Guy
Columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.
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Question

Dear Credit Guy,
I owe $3,400 on my credit card, but I have been delinquent for six months. The credit card company offered me $1,300 to settle. I just got a full-time job and can make the $1,300, but I have doubts.

Should I take the settlement offer since my credit score has been affected, or should I still pay the card issuer in full? If I choose to settle, do I have to get a written form for the agreement? – Edward

Answer

Dear Edward,
On the surface, taking the settlement may seem the right thing to do. After all, you will save $2,100 and then you will be done, right?

You say you have the $1,300, but you didn’t indicate whether this offer meant you must pay the entire amount at one time. This is generally how settlement offers works, so I am going to assume that this is the case.

While it is true that taking the settlement will make your creditor go away, you will find that you aren’t quite done yet.

The impact of a settlement on your score
First, as you pointed out, the fact that you are six months delinquent on your credit card has already damaged your credit score. However, if you take this settlement your score will take a further hit.

  • Credit scores exist in large part to give potential creditors an idea of how a consumer handles credit obligations. A settlement says to future potential creditors that you did not fulfill your obligation.
  • That mark will stay on your credit report for seven years, and while it will diminish in importance over time, seven years is still a long time.

Additionally, that $2,100 very likely will be reported to the IRS as a canceled debt. If so, you will be issued a 1099-C “Cancellation of debt” form, and you will have to include the amount forgiven in your gross income for the year, and pay taxes on it. Unless you qualify for an exclusion or exception, you may owe additional taxes on that amount at tax-time.

Options to pay in full
For these reasons, it is generally a better idea to try to find a way to pay the entire amount you owe.

  • This could mean working directly with your creditor to come up with a payment plan, or contacting a nonprofit consumer credit counseling agency to assist you.
  • The Federal Trade Commission offers a list of qualified agencies that can be found here.

 

Video: The basics of debt settlement

Before you decide what you are going to do, take a look at your expenses and see what you can reduce or even cut out for the time being.

You also may have to consider getting a second job or selling something to come up with the extra funds you will need to make your payments.

If you can come to an agreement, be sure to ask for it in writing before you start making payments. The same is true if you decide to go ahead with the settlement – get the terms in writing before any money exchanges hands.

Take care of your credit!

See related: Do you have what it takes for DIY debt settlement?, 1099-C frequently asked questions

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Updated: 08-18-2017

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