Debt Settlement

April 22, 2010 1:30 PM

I have a credit card debt of $4200 on a closed account, which I want to get rid of by end of this month. The interest rate charged is almost $65 I talked to the credit card company and asked for a settlement which they agreed for 60% off my balance i.e pay $2500 approx, but said this will be reported on my credit report, and I will also owe tax on the remaining debt. Should I go this way, or pay off my debt completely?. I have an average credit score of 660 and have no other debt.
posted by jassi to Work & Money (9 answers total)

If I were in your position, I would continue paying off the debt completely. In the larger scheme of things, an extra $1700 over time seems (to me) worth it to avoid a credit score hit.
posted by davejay at 1:45 PM on April 22, 2010

If you have $2500 to pay down this card by the end of the month, the monthly interest on the remaining $1700 would be cut down to $26/month (if my math is correct). You don't say how long it will take you to pay off the remaining debt, but it's not huge by any measure and in your position I'd pay it off completely.
posted by not that girl at 2:10 PM on April 22, 2010 [2 favorites]

Applying the "everything is negotiable" rule, I'd try counter-offering a higher partial payment, say $3000, in return for no credit history damage. No idea if they would go for it, but if they do, you would want their promise in writing before sending them the check.
posted by zippy at 2:13 PM on April 22, 2010

I've had several debts go to collections and then paid them off at a later date for a percentage of what I actually owed. I've never been hit with any kind of tax issues in those instances. After the debt was paid (at the lowered rate (60%)) they sent notice to the credit agencies that the debt was cleared and my score jumped up.

Paying them anything should not make your credit take a hit...only not paying.

Then again I could be talking out my ass.
posted by AltReality at 2:18 PM on April 22, 2010

Pay it off completely, unless you don't plan to buy a car or house in the next 7 years. Nobody knows how badly it will impact your credit score, but you want to be building toward 700, not away from it. The difference of 1700 is the sort of thing that will easily be made up for by a good interest rate on a loan.

Forgiven debt is taxable as income by the IRS. However, if you have to consider what tax bracket you're in... it may not matter too much. You should consult your accountant.
posted by jeffamaphone at 3:25 PM on April 22, 2010

Here is the irs.gov page on debt cancellation.
posted by jeffamaphone at 3:26 PM on April 22, 2010

You will pay way more than $1700 in higher interest rates for future loans and higher insurance premiums over the next several years if you have poor credit. Find a way to pay the whole amount.
posted by Jacqueline at 9:03 PM on April 22, 2010

Did you buy the stuff?
Pay the bill.
In full.
posted by 2oh1 at 10:30 PM on April 22, 2010 [2 favorites]

Response by poster: I guess yes I should pay in full. Even though it hurts, I have to part with this money...Thanks everyone for your inputs...
posted by jassi at 7:27 AM on April 23, 2010