Settling credit card debt

[NYCDiane]

Does anyone know how settling credit card debt vs paying it off in full will affect a credit score? Here's the back story:


Last year, I had a major issue going on and had to stop paying on my credit cards. I only missed 4 or 5 payments on each. Once things got back in order, I paid off 3 of the cards. The rest, I put with a debt management program and that is going well. There are 2 cards, however, that refused to participate in the program.

For the cards that are in the DMP, they are listed on my credit report as "paying as agreed" "with DMP"

For the 2 that refused to participate:

One is with a collection agency. I am paying the collection agency a small amount monthly. The account is still owned by the credit card company. They are updating the balance monthly so it shows I am making payments but it doesn't say that I am "paying as agreed" (since I'm techincally not paying as agreed)

The other was charged off and sold to a debt buying company. They placed it with a collection agency. They are adding interest to the debt (illegal, but that's another story) and there's no way I can send them monthly payments to lower the balance. The interest they are charging is astronomical -- 24% compounded daily. I would have to send them about $100/mo just to keep up. I don't have that kind of money so I'm not paying them anything. I have an attorney looking into the legality of them charging me interest and we will sue them under the FDCPA if necessary.

Anyway.... I was thinking about settling these two cards just to get them out of the way. I know the first card will take a 30% settlement, possibly even 25%. They already offered to settle with me just to get it closed out.

The second card, I was thinking about offering them 25% of the balance. They bought the debt for a significant amount less than what was owed. Companies like this one buy debt in bulk and typically pay maybe 5 to 10 cents on the dollar. If I give them 25% of the balance, they'd still be making money off it. HOWEVER..... this card is listed on my credit report as "charged off, sold to third party". The company that purchased the debt hasn't listed it on my credit report at all. Sooooo.... even if I were to pay it in full, it won't reflect positively on my credit report. The only positive about settling this debt would be that this third party company would be off my back about it and I won't have to worry about them suing me for the debt.

Okay, my big question is: If I end up settling these debts, will my credit score increase? Will it increase significantly? I know that having the one listed w/a collection agency is affecting my score negatively and the "charged off" one, I can add a statement to my report showing it was settled once I settle.

I need to get my credit score up by at least 75 points. I'm planning on moving next year and I have to have a good score if I want to get into a good building.

 

[disneyfreakk]

Does anyone know how settling credit card debt vs paying it off in full will affect a credit score? Here's the back story: Last year, I had a major issue going on and had to stop paying on my credit cards. I only missed 4 or 5 payments on each. Once things got back in order, I paid off 3 of the cards. The rest, I put with a debt management program and that is going well. There are 2 cards, however, that refused to participate in the program. For the cards that are in the DMP, they are listed on my credit report as "paying as agreed" "with DMP" For the 2 that refused to participate: One is with a collection agency. I am paying the collection agency a small amount monthly. The account is still owned by the credit card company. They are updating the balance monthly so it shows I am making payments but it doesn't say that I am "paying as agreed" (since I'm techincally not paying as agreed) The other was charged off and sold to a debt buying company. They placed it with a collection agency. They are adding interest to the debt (illegal, but that's another story) and there's no way I can send them monthly payments to lower the balance. The interest they are charging is astronomical -- 24% compounded daily. I would have to send them about $100/mo just to keep up. I don't have that kind of money so I'm not paying them anything. I have an attorney looking into the legality of them charging me interest and we will sue them under the FDCPA if necessary. Anyway.... I was thinking about settling these two cards just to get them out of the way. I know the first card will take a 30% settlement, possibly even 25%. They already offered to settle with me just to get it closed out. The second card, I was thinking about offering them 25% of the balance. They bought the debt for a significant amount less than what was owed. Companies like this one buy debt in bulk and typically pay maybe 5 to 10 cents on the dollar. If I give them 25% of the balance, they'd still be making money off it. HOWEVER..... this card is listed on my credit report as "charged off, sold to third party". The company that purchased the debt hasn't listed it on my credit report at all. Sooooo.... even if I were to pay it in full, it won't reflect positively on my credit report. The only positive about settling this debt would be that this third party company would be off my back about it and I won't have to worry about them suing me for the debt. Okay, my big question is: If I end up settling these debts, will my credit score increase? Will it increase significantly? I know that having the one listed w/a collection agency is affecting my score negatively and the "charged off" one, I can add a statement to my report showing it was settled once I settle. I need to get my credit score up by at least 75 points. I'm planning on moving next year and I have to have a good score if I want to get into a good building.

I would ask this on creditboards.com they will know all of the ins and outs of credit problems!

 

[NYCDiane]

Thanks! I'll check it out.

 

[IBelieveInTheMagic]

I'm certainly not a professional on this, however I can tell you I've dealt with this with my employer (Fortune 100 company) and the customers who have wanted to settle their debt.

You've received great advice to seek out the other boards. I also wanted to make sure you were aware you'd receive a 1099c for any savings $600 or more. It's considered taxable income, if this applies to you, which of course I wouldn't know

I do know Settlements are R9 (major derogs) however they do report zero balances on the credit bureau. You might be trading one "bad debt" for another so you really need to look into this and consider all options, especially with the possible tax implication. Do you have a tax advisor you could also reach out to?

I hope it works out for you!

Heather

 

[wiigirl]

I would ask this on creditboards.com they will know all of the ins and outs of credit problems!

 

[mistysue]

They can, and will, report to the credit agencies when you pay them off. Even if it's isn't listed. My DH has an item on his credit report that was never reported until after we paid it off- even though it was about 5 years old when paid off, they can leave it on his report for 7 years past the date he paid it! So that item will be on there looking bad for a good bit of time. So paying or not paying, you take your chances with whether it's getting reported, but it looks bad paid or not once it's listed.

 

[Darcy03231]

Also, keep in mind that some companies will take a lower amount as "settlement in full" and will then send you a 1099 at the end of the year for the difference which you will need to pay the taxes on.

 

[NYCDiane]

Also, keep in mind that some companies will take a lower amount as "settlement in full" and will then send you a 1099 at the end of the year for the difference which you will need to pay the taxes on.

I know about the 1099 but you don't have to pay taxes on the forgiven portion of the debt in all cases. There is an IRS form you file when you do your tax returns and if your debt (not the forgiven debt) exceeds a certain amount in relation to your income, you don't have to pay taxes on it.

I'm not concerned about that, however, I just want to get these taken care of and increase my credit score (because with them just sitting there, my score is taking a hit)

 

[Marionnette]

I know about the 1099 but you don't have to pay taxes on the forgiven portion of the debt in all cases. There is an IRS form you file when you do your tax returns and if your debt (not the forgiven debt) exceeds a certain amount in relation to your income, you don't have to pay taxes on it.

I'm not concerned about that, however, I just want to get these taken care of and increase my credit score (because with them just sitting there, my score is taking a hit)

Anyone who is considering extending you credit is going to want to see that you have a record of actually paying what you owe. Anything less than that is going to leave a bad mark on your credit reports and keep your score low for a very long time, that includes delinquent accounts and charge-offs. Debt settlements will lower an already-bad credit score by 45-65 points per card. If you're considering doing this with just 2 debts, you could lower your score even more to the tune of 90 points, perhaps more. That's going to make your climb to good credit even harder.

It took some time to wreck your credit, now it's going to take even longer to improve it. There is no magic bullet or pixie dust that will change this. A long record of paying what you owe - on time - and keeping your debt-to-credit ratio low is the best way to improve your score.

 

[ZehnJahren]

As an aside, Suze Orman always reminds people that once something's on your credit report, it's there. The damage is done. If you have negative dings and charge offs, paying it off will not improve your score immediately, it will just "look better" in the long run.

I had medical bills that piled up that I couldn't pay about seven years ago. I ended up paying them all and have had exemplary financials since - I have a student loan and a car loan that are paid before the date every month, and my credit card is always paid in full (I use it for cash back, and for extra protection when buying electronics and doing car rentals). But those old items are still on my credit report and influenced my current score. Because of their age, they're finally starting to fall off my report and I'm seeing my score rebounding in a major way.

Increasing your score by 75 points in a year will be a REAL feat. Especially since you will take hits if you settle the debt.

Edited to add: One thing you could TRY is to negotiate with the debtors that if you pay the bill (either at a negotiated rate or in full) that they will remove it from your credit report. If you go this route, you must have everything in writing. Once they agree to a settlement, for example, they would need to send this to you via snail mail with the terms outlined that they would be removing it from your report, and you would want to send your payment via registered mail. If they don't remove it from your report, you can then go to the credit companies with the letter and your cancelled check or credit card statement showing you paid it, and they will remove it. It's a long shot, but worth trying, and some have had success.