Should I settle my debt?

As always, the responses provided here are for informational purposes only and are not intended as legal advice.

I have recently taken out a low interest loan to pay off some high interest credit card debt. My payments have always been on time and I have unfortunately carried a balance for a long time. Is there any way to reduce my credit card payoff amount that will not have a negative impact on my credit rating? –Richard

Hi Richard –

The short answer, unfortunately, is no. You could certainly contact your lender to ask about options, but they are very unlikely to offer you an opportunity to pay anything less than the full balance.

Debt settlement can be a useful tool to help you pay less than what you owe, but that’s at the cost of your credit rating. The only creditors (of a sort) willing to take less than the full amount are usually debt collectors, and if you’re dealing with debt collectors your credit history has likely already taken a beating.

Moving your debts to a low interest consolidation loan is a good step if you weren’t seeing much progress before. Bear in mind, however, that your credit may have already been negatively impacted by this move, as your credit card accounts have assumedly been closed and replaced by a new loan – older accounts have a more favorable impact on your credit score.

If you’re still struggling with the new loan you may benefit from speaking with a budgeting counselor. Paying back a large debt almost always takes a lot of hard work, but a trained counselor may be able to help you find a plan of attack that works better for your unique circumstances. Good luck!

I am paying off two small credit cards this month and would like to close them so that I am not tempted to use them again. I've heard it looks bad on your credit report to close credit cards. Is that true? –Sandy

Hi Sandy –

It won’t necessarily look bad to close those accounts, but it may cause your credit score to go down.

Part of your credit score is based on how old your open accounts are. The idea is that the older your accounts, the longer you’ve been (hopefully successfully) handling credit. Additionally, your score also factors in the total number of open lines of credit – too many accounts is bad, but so is too few.

That’s not to say that you shouldn’t close the accounts. If the accounts have bad terms or if they trigger bad money behavior on your part, it may be better for your long-term financial health to get rid of them. Just keep in mind that your score may dip after the accounts are closed. Also, if those are your only credit accounts your score may stay down; you need to use credit (wisely) in order to build a positive credit history. Good luck!

I have had breast cancer and have not worked for a year. The money I owed a bank is now on my credit report for more than I initially owed and excluded all the payments I made. How can I ask them to please cancel the amount owed or settle for a small lump sum? Thank you so very much. I am on SSI as of 6/15. –Gloria

Hi Gloria –

First, I wish you better health. Your personal welfare always takes priority over financial issues.

As for your debts, if you were unable to stay current with your payments while you were without income, those may have been sent to collections. If your balance is more now than it was before, that may be because of various fees or interest charges.

If you’ve made payments and they don’t appear to be reflected on your credit report, go back and look at your monthly statements. You need to verify whether or not your payments were being received. If you’re certain that you made payments, but your creditor shows no record of those payments, you’ll need to gather up proof that those payments were made – canceled checks, if you paid by check, or bank statements, if you paid electronically.

One possible explanation for the missing payments – your account was delinquent and then sold to a collection agency, but you made payments to the original creditor. Usually that original creditor will forward your payments on to the new creditor (the collection agency), but that takes time and could lead to a gap between the amount you’ve paid and the amount your credit report says you’ve paid.

Your best first step is to contact whoever owns the debt (it will be listed on your credit report). Verify whether or not they’ve received your payments. You should also verify the amount of the debt and whether or not it includes any added fees.

Your creditor is very unlikely to forgive your debt, but they may be willing to settle the debt for less than what is owed. As noted in the response to the first question, settling on a debt can be very damaging to your credit score. Given the circumstances, however, your credit has most likely already been negatively impacted, so that’s not as much of a concern. If you want to pursue a debt settlement, you can do that directly with the creditor. Collection agencies are often willing to accept a fraction of the debt amount if you can make a one-time payment. Just make sure that any agreement you make is in writing.

You may also want to speak with an attorney. If your Supplemental Security Income (SSI) is your only source of income, you may be advised to not pay anything. That’s because SSI is protected from garnishment, meaning that a creditor may sue you for the money owed, but a judge would not be able to place a garnishment on your SSI benefits. Again, if you’re thinking of pursuing this option, be sure to speak with a qualified attorney first. Good luck!