Getting behind on your debts can haunt you for years. Sometimes, creditors agree to be paid a portion of what you owe and to write off the rest. However, the debt will still appear on your credit report after you have settled.
The Risks with Settlements
Settlements might help you come out from under seemingly unbearable debt, but they have one key drawback. A settlement means that you didn’t pay in full. This gets reported on your credit report and anyone that reviews your credit report will see that you didn’t pay everything you owed. Your credit report will also show all the activity – such as missed payments – that led up to the settlement.
Settlements and Your Score
The life of a settlement is clear. Its impact on your score, though, is less so. A credit score usually looks at your entire report but pays particular attention to negative behavior. Agreeing to pay less than you owe to your creditor will stay on your report for up to seven years.
Tax Consequences and Liens
When you settle a debt, it’s likely you will need to pay taxes on the amount you were forgiven. The IRS wants to know if you get out of paying in debt and will make you pay tax on the amount your settlement saves you. If you don’t pay those taxes, the IRS can come after you to pay.
The risks associated with paying any creditor less than you owe can be detrimental enough to your credit score to create real challenges when trying to achieve other goals – like financing a car or securing a personal loan. Settling your credit card debt might seem like a sweet deal, but before you consider this option, check with a financial advisor first.
About the Author
Solomon Poretsky has been a writer since 1996, with experience in the fields of financial services, real estate and technology. Poretsky holds a Bachelor of Arts in political science from Columbia University.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.