pay-off consequences

[jinzapa]

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?

[ml143333]

The bank most likely will issue you a 1099 at the end of the year on the difference between the settled amount and the credit card balance if that amount is greater than $600.00. You will have to claim that on your taxes and pay taxes on that amount. I settled with a credit card company in 2008 and received a 1099 for $16k. Paying the taxes was still better than paying the $16k. I was able to work out a payment agreement with the IRS and all is okay.

Will this negatively impact your credit score? Yes it will because the credit card company will likely report it as "paid for less than the full amount". Also if you have been late prior to the settlement, they will also report the lates.

Basically, you have to look at your bottom line and figure out what is better for you and go from there. Hope everything works out for you.

[samruba]

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.

[idezine123]

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.

What about closing the account with a 5 year payoff at a lower interest rate? Does that affect your credit score in a negative way?

[agile1]

idezine123? Have you got your question?
I have same issue now.
My creditcard companies called me, and offered 0% interest for 5 years payoff payment plan.
Will the bank issue me 1099 after paying off?

[shobam]

idezine123 - If you are referring to going to a credit counseling company like American Consumer Credit counseling (ACCC) and have them manage your debt at a lower rate but pay the whole amount over 5 years, the answer is no, but yes. Here’s how. I have been using ACCC to deal with 20K in loans, CC and other debt occurred during a period of unemployment and hardship. I was very close to BK 7 and going through a short sale. As we were getting close to closing we went to ACCC, they said that the lenders look at credit counseling as a “neutral” mark against you. It show on your report as “Account managed by counseling agency” or some such comment but its there. My score was hurt by the short sale in the end. When my 3 accounts began to show that they were being managed by a counseling agency my score did not move, it was about 690 at the time; BUT, and it a huge BUT. I was not able to get a loan to repair my roof; the one CC that we kept open and was using in situations where you had to have a CC was reduced in limit the day we made a large payment. In the letters of rejection and reason for limit reduction all said……………you guessed it – In credit counseling. So there you have it

[texansfan]

For most people who are way behind or have stopped paying on the credit cards, their credit is already screwed up to begin with. I have settled on a couple of accounts and don't care what it says on the credit reports. I have no intention of ever getting a credit card again, as I only use my debit card.

I was able to obtain a loan from from credit union just yesterday, so settling with them hasn't hurt me. My credit union is great and they always work with me as opposed to the big banks.