What happens if I settle a debt for less money?

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Q. If I owe on a credit card and they are willing to settle the debt for less money, what looks better on a credit report? If they say the debt was paid in full or if they say the debt was settled for a lesser amount?
— Debtor

A. We’re not so sure a credit card would report that a debt was paid in full if it wasn’t actually paid in full.

Of course, it will look better on your credit report if the debt was paid in full.

Credit report aside, you should know that if you settle a debt for less than the full amount, the amount of the debt that is forgiven is treated as income to them for tax purposes, said Ilissa Churgin Hook, a bankruptcy attorney and member of Hook & Fatovich in Wayne.

The creditor that you settle with would issue a Form 1099, and that gets reported to the IRS, she said.

“It would be prudent for a consumer to check with a tax professional to determine their potential tax liability prior to agreeing to a settlement amount,” Hook said. “It could be that the consumer has sufficient deductions so that the tax implication of the settlement is negligible; however, it would be wise to have that information first.”

Then, she said, depending on the amount of debt and the number of credit cards that are at issue, you may want to consider whether a bankruptcy filing is a viable option, Hook said.

“Notably, there is no debt forgiveness income in connection with a Bankruptcy Court Discharge Order,” she said.

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This story was originally published on June 5, 2019.

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