Is it better to settle a debt or pay a debt in full?

What is Debt settlement?

Debt Settlement is really you offering to make one large payment (but not the entire payment) towards the balance of a debt.

In return the company forgives the remainder of the debt and the debt is settled and you no longer owe the full amount.

For example, you owe $10,000 on a credit card balance and they accept a payment of $6,000. The $4,000 is forgiven.

What if I stop making payments?

Companies may require you to stop making payments if you decide to settle on your debt. In return this is going to report as late payments to the credit bureau. This is going to have a negative impact on your credit report.

As a matter of fact, when you miss a payment, it can drop your credit score 100 points.

Does settling on my debt affect my Income Taxes?

I would like to point out the IRS may assess income taxes on the $4,000 that was forgiven. They typically treat this like income or money you earned. So, what this means is you will have to pay income taxes on the money that was forgiven.

However, Insolvent tax payers whose liabilities are greater than the fair market value of their assets can exclude the income settling a debt.

What is insolvency?

Insolvency is the inability to pay one’s debts. This occurs when your debts exceed your assets. For example, if you only owned a car and had no other assets, and this includes money in a savings account. The value of the car is $2,500 and you owe $5,000. You are insolvent because what you owe is greater than the value of your assets.

Paying the debt

If you make the minimum payment on time for a credit card, this will have a positive impact on your credit report.

If you are unable to make a loan payment, I highly recommend getting in touch with the lender to see what options you have. It is much better to contact them right away than to avoid them. I know this is easier said than done, but most companies are willing to help you.

Past Due Notices

It may not feel nice when you receive a notice in the mail about being past due. It’s hard. It feels embarrassing and now the last thing you want to do is call them.

Please realize these are standard letters that include the legal information that needs to be sent to you. It’s not meant to be mean, but meant to let you know what is going to happen.

Considerations for non-payment

When you are in a financially challenging time, it can be very difficult to keep your emotions in check. Some things to consider when deciding to not pay your bills are: Repossession, Employment risk, wage garnishment, amount of debt, interest rate, impact to credit score, emotional toll & your financial goals.

Paying a debt or settling really depends on your financial situation, and goals. There are no right or wrong answers. What you really need is all the information to make the right decision for you.