Settling Debts

by Scott Bilker
Scott Bilker is the author of the best-selling books, Talk Your Way Out of Credit Card Debt, Credit Card and Debt Management, and How to be more Credit Card and Debt Smart. He's also the editor and publisher of DebtSmartŪ.

Scott,
My ex-husband has a friend who works with delinquent accounts at a credit card company. She told him that if he let his account go into delinquency that in about six months he'd be able to "settle" it for 40 percent of what he owed.

I believe that part of it however, she also told him that it would NOT reflect badly on his credit report. That it would merely be noted as "settled" and that no creditor would see that unfavorably. I can't believe this is true and I am afraid my ex is going to very sadly surprised when he goes to by a house in a year. So before he goes ahead with this crazy scheme could you please confirm that what this person told him is true?
Rebecca

Rebecca,

Your intuition is correct.

It is true that credit card banks will not negotiate settlements until the debtor is delinquent for a minimum amount of time. It makes sense from their perspective because, why would they settle an account if the debtor were still making payments?

There is something else that your ex needs to know about settled account. The difference between the amount settle and the original balance will be reported to the IRS on a 1099 as income and taxes are due! This probably will not amount to much but it is another cost in settling an account.

Settled account will be reported as such. And you are correct to believe that this will be looked on negatively by other lenders. You don't have to be in the banking industry to come to that conclusion. Image the mortgage bank considering your ex's application. "Gee, looks like you 'settled' an account. Hmmm, let me see...you borrowed money from another bank and only repaid 40 percent. Wow! You're a good risk! Here's that $200,000 you need for the house." I think not.

If you do settle an account with a creditor you want to ask to make sure that one condition of the settlement is that the account is reported as "account paid satisfactorily." This may not always be possible however, if the bank agrees you want this in writing before starting payments.

My advice is that your ex avoids using a debt settlement as a scheme for dodging his debt repayment. If you have no other options then it's time to consider debt settlement or bankruptcy but these shouldn't be the first choice.

Hope that helps!

Regard,
Scott