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Settlement: to pay or not to pay...


tarbaby
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first before you jump on me about "searching"..i did the search thing and couldn't find what i wanted to know...anyways...

i'm helping a co-worker fix her reports. she has several cc's where she recently settled on. not sure if that was a good thing because she only had like one or two "over 30 days late" on each card that happened over the past few months. soooooo...my question is this...since it was just a recent late hit, should she have settled or just started making payments to pay the entire balance? i did read somewhere that settlements are considered as "charge-offs" on the cr's. if thats the case, should she pay the amt charged off? will they change the status on the cr's?

xdancex

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Settling was probably a bad move. You are correct in that "Settled for less than full" = paid charge off. Why? Because in settling for less than the full balalnce the creditor has to charge some amount off the books. The charge-off will stay for the full 7 year reporting period whereas the 30 day lates generally would fall off after only 3 years or so. 30 day lates also do not have much effect on your FICO score after 2 years, whereas a chargeoff, even a paid one, can hurt for twice that.

In addition to the charge off problem, if the amount forgiven is in excess of $600, she just lines herself up for a tax hit because creditors are required under the Tax Code to report any amount charged off in excess of $600 on a form 1099 to the IRS (it's voluntary if less than $600). That means she'll have to pay tax on the forgiven amount as if it was income.

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Possibly. Technically they should since they are no longer writing any portion off. If they have already filed 1099s they probably won't agree to it since retracting the IRS filings would be extremely difficult.

Truthfully, I've never heard of anyone trying to pay-up a settlement to get it changed from a paid chargeoff to paid as agreed. But, I believe it is possible.

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she has several cc's where she recently settled on. not sure if that was a good thing because she only had like one or two "over 30 days late" on each card that happened over the past few months. soooooo...my question is this...since it was just a recent late hit, should she have settled or just started making payments to pay the entire balance? i did read somewhere that settlements are considered as "charge-offs" on the cr's.

Yep, she trashed her credit worse than it was already. I would certainly try to work with the OC for the balance and maybe get a paid as agreed for it. If it was recent enough, she may say, "Oh, I didn't know," and they might work with her.

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