3 Things to Consider Before Settling a Debt

If you fall behind on a debt, your creditor may extend an offer to settle the debt for less than the balance due. When you settle a debt, you pay only a portion of the balance due and the creditor cancels the rest of the debt. Settlement offers are typically only made on past due and charged-off accounts and on debt collections. If you’ve received a settlement offer from one of your creditors, here’s what you should consider before taking it.

The Settlement Amount Should Be Paid Quickly

By the time an account is past due, you may not have options for making small monthly payments on the debt. If a creditor or debt collector makes you a settlement offer, you’ll only have a short period of time to accept the offer and make your payments. Some creditors may be willing to break up the settlement payment in two or three payments. Others may require you to pay the settlement in one lump sum.

Your Credit Will Be Affected

The status of the debt on your credit report will be updated to show that you settled the account instead of paying it in full. This could affect your credit score. However, in the long run, it’s better that you’ve made some effort to pay off the account rather than leaving an outstanding balance.

It Could Impact Your Tax Liability

Businesses are required to report debt cancellations over $600 to the IRS. They’ll also send you a 1099-C Form with the amount of the cancelled debt. You’re required to include this in your taxable income on your next tax return. It could impact the amount of taxes you owe for that filing year. If you cancel and receive a 1099-C Form, make sure you ask your tax preparer about the impact to your finances.

If you decide to take a settlement offer, make sure you get the agreement in writing. The agreement should include all the terms. The agreement should clearly state that the settlement amount satisfies the debt in full. Keep a copy of the agreement and proof of payment for your records.