Settled for Less Than Full Balance

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If I settle an account for less than the full balance, will that harm my credit score?
If I ask my loan company that I have made all payments for four years on time, if I could negotiate settling for a lower amount than what is owed. Does it reflect negatively on my credit report?
An account marked as "Settled for less than full balance" will be a negative mark on your credit report, as explained below.
Settled for less than full balance
Many creditors will accept less than the full balance as payment-in-full. This is known as a settlement or resolution of the debt. However, you cannot simply ask the creditor to resolve or settle the debt for less than the full balance. To understand how to settle the debt for less than the full balance, we need to look an account from the creditor's perspective.
When a debtor stops paying on a debt, and the number of days since the most recent payment reaches 120 days, the account is no longer considered current, and the creditor is required to "write-off" the debt. Credit issuers are required to do this by the federal Office of the Comptroller of Currency, in an attempt to prevent banks from inflating future earnings statements with old and defaulted accounts. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease, or that the debt is forgiven. The write-off date has no legal significance, and almost nothing to do with the statute of limitations for debts.
At the write-off point, the creditor discounts the value of the account and will transfer it to a late-accounts department. This is where the synonymous terms "write-off" and "charge-off" come from. It also has the option to either assign or sell the debt to a collection agent. It is after write-off when debtors can start negotiations to pay less than full balance. However, keep in mind the collection agent has the right to collect the entire balance due plus interest.
Debt negotiation, also called debt settlement or debt resolution, is the process of negotiating with the creditor to either establish a new payment schedule at a reduced interest rate, or a lump sum payment that is significantly lower than the total balance.
Keep the following five thoughts in mind should you choose to settle a debt for less than the full balance:
- The amount you can afford to pay. This should be a reasonable amount -- start with 40 cents on the dollar. Low-ball offers will be rejected immediately unless the debt is a second mortgage, which start at even less.
- Creditors are not required to negotiate. They often will, if the next option is bankruptcy, but do not expect them to make it easy for you.
- Negotiation is a process. When you negotiate, you make an offer and your arguments. Expect them to make a counter-offer and counter-arguments.
- You are negotiating with a person. If you are friendly and professional, they will be as well. Explain your situation in personal terms without becoming emotional. Listen to their arguments and answer them clearly. Your job is to convince them to see your side. Their job is to convince you to pay more. If you both play your roles properly, you will reach an agreeable settlement.
- Your credit score will suffer a setback. The creditor will almost certainly mark the account in question as delinquent during the 120-day period, and while in negotiations with the creditor. Once an agreement to resolve the debt is reached, the creditor will mark the account "Settled for Less Than Full Balance" or "Legally settled for less than full balance." This account will remain on your credit report for 7½ years after the date of first delinquency.
Debt settlement
To learn more about debt resolution including bankruptcy, read What Are My Debt Resolution Options?
One final thought: Although it might seem odd to pay a fee to save money, experienced debt negotiators will save you far more than the cost of their fee. They know which creditors are willing to negotiate and how much of a settlement they will accept. Due to their network of relationships, they can settle debts you could not on your own. Visit the Bills.com debt relief saving center to get no-cost, no-obligation quotes from pre-screened debt settlement service providers.
I hope this information helps you Find. Learn & Save.
Best,
Bill

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Debt statistics
Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Housing debt totaled $12.82 trillion and non-housing debt was $4.88 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Each state has its rate of delinquency and share of debts in collections. For example, in Missouri credit card delinquency rate was 4%, and the median credit card debt was $417.
While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.