Effect of 'settled in full' , and how is it coded?

[Anonymous]

Hi – I’m helping my stepdaughter with a credit card debt inherited from messy divorce.  The debt is still with the credit card company.  I've been reading a lot of posts and I have a couple questions.

The debt is still with the credit card company.  We have been paying a minimum each month to keep it from being charged off as we are trying to keep her credit as undamaged as possible, so she will hopefully be able to get a mortgage and the kids back into a house.  The CC company has offered to settle for one half the $10,000 owed and mark the account as “settled in full”. 

First question is while I understand this will be on her CR for 7+years -  How negatively does it impact the score ? Enough to preclude getting a mortgage in a couple of years?

I have been reading many posts on this forum.  Including the following one by someone who sounds very knowledgeable :

"Re: Paid in full vs. settled in full

Options

‎05-02-2011 04:37 PM

When you pay an account, either in full or under a settlement agreement for less than the full amount, if the payment is accepted by the party as legal fulfillment of the debt, then there is only one current status code (field code 17 of your credit file) for their reporting.  That status code is "paid."  There is no current status code for reporting "paid for less than the full amount."

That information is separately reported under field code 19, "Special Comments."  It would then clarify that the "paid" status was achieved through a payment for less than the full amount of the debt owed.  A current status of "paid" does not mean it was paid in full.

Since FICO does not score payment or nonpayment of a debt, but only events that occurred along the way, these are not important to FICO scoring. It makes no FICO scoring difference if it was a PIF or a settlement".

The difference in importance comes about when a prospective creditor does a manual review of a consumer's credit report.  The Special Comment "paid for less than the full amount" is something they are apt to pay close attention to.  It tells them that you have, in the past, not fully met the total debt you accrued".

 (end of post)

From this, it sounds like that if the account is settled in full, or paid, the creditor has no option but to mark it as paid and then put that it was 'settled in full' in the special comments. Is this true? 

Many have noted the importance of requesting that no special comments be added, but if the above is true it would require the lender to mark it as paid and not put in a special note that it was settled in full, which I imagine some would be reluctant to do, but I should ask never the less, correct?

Is there any thing else, or something better we should request?  I read the info on PFD but sounds like its for accounts in collection and not that likely in this case.

Thanks in advance; great forum!

[llecs]

If you settle any account, it will report as "settled" or "paid for less than full" or "settled in full". This is certainly scored by FICO. It is scored on par as a charge-off. There are many comments out there that get scored. 

On the scoring impact, it would be minimal if the account had updated recently. You're trading one baddie for another. Going from "charge-off" or a CO status w/ recent lates to "settled in full" won't negatively impact your score because both are bad. If the CC is factored into utilization and paying or settling the CO improves your CC utilization, then you might actually see a FICO increase once settled or paid off. 

If I had that, I would send a PFD. This $10k baddie is a perfect example for a reason as to why a PFD should be sent. You (well, she) can send a PFD for the amount they offered in their settlement offer. 

ETA...missed the portion the TL is in good standing. They likely won't accept a PFD because it is current. Because the TL is current and not a CO, an added settlement comment could significantly ding your credit. You aren't trading one baddie for another unlike mentioned in my comment above.

[RobertEG]

The coofusion is over the term "settled."

Technically, and debt for which they accept payment, regardless of the amount they chose to accept,as satisfaction of the debt is both a paid and settled debt.

However, the common use of the term "settled," both here and within the credit industry, is to differentiate between paid in full and paid for less.

"Settled in full" is thus used to indicate the debt was satisfied, but the creditor accepted less than the full amount of the debt.

It is, in my opinion, very poor and confusing terminology, as "in full" usually refers to the full amount of the debt, and you cannot have a payment for the full amout of the debt that is a settlement for less than the full amout of the debt.

You are dealing with semantics.  A person reading your CR, if they see the word "settled," wlll most likley interpret it to mean paid for less.

[Anonymous]

Thanks guys,  we'll try the PFD. 

If they don’t go for it should we ask them to mark it as Paid, with no comments, instead?

Can they/ will they do that?  (is that against some law that requires them to report accurately?

And, if they refuse the PFD, or to mark it paid  (just to be clear there is no CO as of yet), why pay $5000 to get it marked as 'settled in full' if that has the same negative effect as a charge –off?  Why not just let them charge it off?

Thanks for being so generous with your advise and time to respond so thoughtfully!!

[llecs]

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@Anonymous wrote:

Thanks guys,  we'll try the PFD. 

If they don’t go for it should we ask them to mark it as Paid, with no comments, instead?

Can they/ will they do that?  (is that against some law that requires them to report accurately?

And, if they refuse the PFD, or to mark it paid  (just to be clear there is no CO as of yet), why pay $5000 to get it marked as 'settled in full' if that has the same negative effect as a charge –off?  Why not just let them charge it off?

Thanks for being so generous with your advise and time to respond so thoughtfully!!

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I do need to amend my comments in my prior post. If this is a positive account no lates (and I missed that), and going from a positive, on-time TL to a settled TL, then your  TL will be marked as a negative and that can significantly ding your FICO depending on any other baddies that may or may not be reporting. It's a negative to FICO and lenders because lenders want to know if the terms of your accounts were maintained in good-standing. If there's a settlement, then the creditor loses money and future creditors would want to know if that could happen to them.

If the TL is in good standing, they very likely will not accept a PFD. But worth a try.

Why wait for a CO? Because it'll cost more $$$ in interest, they can sue for all $10k+, there'll be added lates, it'll prolong damage to your FICO, make it harder or impossible to borrow from them again, etc.

[Anonymous]

Thank you. Good advice.  We will settle even if they don't PFD.  Thanks again!

[RobertEG]

As for a requirement to report any such comments, they are not required to report all adverse information or special comments that might apply.

The FCRA credit reporting requirement is that any information that is reported must not knowingly be inaccurate, NOT that all accurate information must be reported.

Requirments to report only apply when they have prevsiously reported information, and update is necessary to maintain its current accuracy.

No issue of impropriety in any agreement not to report the paid for less/settlement conditions they agree to.