pay-off consequences

samruba · #1 (**permalink**) 06-15-2010, 09:03 AM

Wife just talked to a couple of the credit card companies we have debt with. In chatting with them and agreeing on a lowered ""settled"" amount, the agent mentioned something to her that she wasn't sure about and not comfortable with;

1. they mentioned the difference in outstanding principle and the settled amount it taxable income

and

2. Agreeing with the amount, once reported to the credit bureau, i.e. Equifax, etc., it will decrease your credit score instead of, in my understanding, increasing your credit score because of overall lowered debt.

sapphirecapital · #2 (**permalink**) 06-15-2010, 01:50 PM

both is right, any amount waived is taxable income, you get a form from them and yes you take a hit but only for a short time whereas default is a major hit, you can level the hit if you can get another credit line, lets say from a store, and do not use it.

janna · #3 (**permalink**) 06-15-2010, 07:05 PM

I believe both of those things are true.

1. Forgiven debt can count as income. They lent you money and you aren't repaying it. Therefore, you got to keep the money. That is income.

2. Settling a debt hurts your credit score because it means you borrowed money and didn't repay it. That isn't a good thing. That isn't what other potential lenders want to see. They want to see a customer who pays his debts, not one who borrows money and then skips out on the bill.

If you're a business and thinking of bankruptcy, you might want to go here first and see what's in there for you debit-free.us/

sapphirecapital · #4 (**permalink**) 06-15-2010, 08:37 PM

For tax purposes the cc will issue a 1099 I believe and the credit score gets hit between 50 to 200 points depends, if you are below 600 there is no hit, if you are above to 680 the hit is minimal (around 50) above 680 to 740 it is usually 100 to 120 and above 740 it is always above 100, sometimes 200; it all depends on the percentage of the debt waiver towards the total debt and if the CC is closed or not etc.

resrev · #5 (**permalink**) 06-17-2010, 02:54 PM

Both are true. As far as the tax issues are concerned the credit card companies may send out a 1099 form if they choose, however talk to your accountant about IRS form 982. Read through that form and see if it may apply to you as you may be able to get those taxes forgiven.

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