(Ask a Question) I am in a position of receiving a little unexpected money this week. I would like to pay off as many bills as possible with this money to make it go as far as possible. I contacted one creditor and inquired if they might settle. They agreed to settling the balance at about 55%. The savings is just under $600. Will this affect my credit score in a worse way than continuing paying monthly through a non-profit consumer credit counseling company?
(Response) It sounds like lady luck has smiled upon you this week. This could be a good opportunity for you to take action against your debt. You have a good question here.
To answer your question using general terms that apply to most debtors, debt settlement affects credit negatively. Credit counseling affects it positively. Of course, your situation presents a unique set of circumstances.
First, debt settlement will absolutely affect your credit in a negative manner. After all, it is a partial default of your debt and it will be reported as such. The exception is if you are savvy enough to negotiate a pay for deletion arrangement that can remove the debt entirely from your credit report. Otherwise, any method that allows you to repay your debt in full without missing any payments will provide a permanent increase to your credit rating in the long run. This is typical with a debt management program, which is one of the tools of a nonprofit consumer credit counseling agency.
The settlement amount itself is important because it may be just below the minimum IRS threshold for reporting forgiven debt as taxable income. The Internal Revenue Service requires that debt collectors report forgiven debt of at least $600, which could increase your income tax liability by a couple hundred bucks. Being able to convince the creditor to remove the debt from your credit report and keep the forgiven debt just under $600 could be an ideal arrangement. If you can accomplish both, then the settlement could emerge as the preferred resolution to your case.
It should be noted that this is a pretty specific situation. Debt settlement is normally not the recommended option, but it does make sense in your situation.
It cannot hurt to get a second opinion from a credit counseling agency. The more information you have, the better you can be sure you are making the right decision.
The most important piece of advice that I could give you is to make sure that you get the deal from the debt collector in writing. If you rely on verbal promises, I guarantee you will get burned!
Tags: counseling, credit, debt, scores, settlement