Q. If I have money to pay off my delinquent debts, should I pay the full amounts owed or negotiate to settle them for less?
A. Having a substantial amount of cash to pay down an old debt puts you in a very good position to negotiate a settlement. Many creditors would rather accept a portion of your debt in cash now, than to wait and possibly receive nothing in the future.
However, there are 3 cons you should consider before cutting a settlement deal:
1. You’ll owe tax on any amount of forgiven debt. When a creditor cancels all or a portion of your debt, they’re required to report it to the IRS. You’ll receive Form 1099-C and must include the amount on your tax return.
2. Settling a debt doesn’t take it off your credit report. Debts with late payment history stay on your credit report for 7 years from the date you originally defaulted, regardless of whether you settle them or not.
3. Settled debt hurts your credit. A settled debt gets labeled as such on your credit report instead of showing up as “paid in full.” That damages your credit score more than if you had paid it off in full. Additionally, a settled debt may give a potential creditor cause to doubt your future credit-worthiness.
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