pay-off consequences

[hemi68charger]

Wife just talked to a couple of the credit card companies we have debt with. In chatting with them and agreeing on a lowered "settled" amount, the agent mentioned something to her that she wasn't sure about and not comfortable with;

1. they mentioned the difference in outstanding principle and the settled amount it taxable income

and

2. Agreeing with the amount, once reported to the credit bureau, i.e. Equifax, etc., it will decrease your credit score instead of, in my understanding, increasing your credit score because of overall lowered debt.

Any of this make sense or is it a scare-tactic?

[disneysteve]

I believe both of those things are true.

1. Forgiven debt can count as income. They lent you money and you aren't repaying it. Therefore, you got to keep the money. That is income.

2. Settling a debt hurts your credit score because it means you borrowed money and didn't repay it. That isn't a good thing. That isn't what other potential lenders want to see. They want to see a customer who pays his debts, not one who borrows money and then skips out on the bill.

[jpg7n16]

Originally Posted by disneysteve

I believe both of those things are true.

1. Forgiven debt can count as income. They lent you money and you aren't repaying it. Therefore, you got to keep the money. That is income.

2. Settling a debt hurts your credit score because it means you borrowed money and didn't repay it. That isn't a good thing. That isn't what other potential lenders want to see. They want to see a customer who pays his debts, not one who borrows money and then skips out on the bill.

Agreed on both.

See more about what the IRS has to say on the tax implications of debt forgiveness here:
Home Foreclosure and Debt Cancellation


And for evaluating how something might affect your credit score, just imagine you lent that money to a friend.:

1. Obviously the best case would be your friend paid you back in full and always on time.
2. Then slightly worse is paid everything back, but was late a couple times.
3. Then you went 3+ months without hearing from your friend, but ultimately they showed back up and eventually paid you in full.
4. Then your friend was only able to pay back half, and you just had to eat the other half (***this is your settlement).
5. Then they paid you nothing back, and you lost all of the money you lent them.

The further down the list, the worse for your credit score.

[cptacek]

It is funny how people think not paying back a loan shouldn't have an effect on their credit score. Do people think a credit score is based on their personality and good looks?

[bjl584]

Originally Posted by cptacek

It is funny how people think not paying back a loan shouldn't have an effect on their credit score. Do people think a credit score is based on their personality and good looks?

In my case, yes.

[jpg7n16]

Originally Posted by bjl584

In my case, yes.

Sorry your credit score is so low haha

[JoshuaHeckathorn]

I agree on both points as well.

Remember, if you're worried about how this will affect your credit scores, you can always attempt to negotiate how the creditor will report to the bureaus as part of the settlement. Some are more willing to work with you than others, but it's always worth a shot in my mind.

[mrpaseo]

Two points I would like to add:

1. Always get it in writing! A verbal agreement on the phone means nothing.

2. You now have a gray mark on your credit that might NEVER go away. Unlike bankruptcy that has a start and a finish point, the settled debt can be updated as often as the creditor wants. Normally, the gray mark would drop off your credit report after 7 years. However, if the creditor wants to send word to the credit peeps stating "Balance still settled" they can do this periodically... indefinitely.

[expo09]

Obviously not paying back your debts in full will hurt your credit score. You need to decide what is most important to you: your credit score or getting rid of this debt.