To settle or not to settle?

[Anonymous]

I have been working at rebuilding my credit to buy a house. When I went to college I took out a credit card with 1st financial bank. Came back from war, struggled to find a job, and before you know it your late on everything. It's taken a couple years paying things off but this is the last thing I feel like I can get knocked off. This account is just under 4000 dollars. It has been charged off and is set to fall off in about 2 years from why I understand. However, I don't want to wait for that before buying a house. What I need help deciding is whether to pay off in full or to settle the debt. I was advised from creditxtra company by a realtor group to pay down to raise my medium score so that I can get a VA loan. I've read that paying can actually lower the credit and restart the SOL on paying back it full. I'm mainly just concerned with pushing my credit up 10-20 points in a hurry. I have around a few thousand and am trying to save for closing cost and such for a house. So I'm hoping to do the most cost efficient approach that I can and still make an impact. Any insight anyone could give me would greatly be appreciated. 

[FireMedic1]

Welcome @Anonymous 

Two ways. PIF will look better than settled for less. Either way it will have to show a $0 balance once completed. To save $. Settle it. Its hurting your score as a CO due to 100% (maxed out) account. If you decide to settle go low and see what they offer. Good Luck!

[Red1Blue]

You can also negotiate a settlement and also have them remove the trade line completely from your report and get the best of both worlds. They might accept to remove the tradeline for partial settlement. Talk to them and see what they say.

[Remedios]

Settling vs payment in full doesnt make a difference scoring wise.

While paying all of it looks better on manual review, you're going for VA loan, so that really wont make a difference 

Keep in mind that any update to negative account, even if it's a payment will cause a temporary scoring drop, but that's not something you should worry about, because your scores can start gradual recovery after it's paid. 

Whatever you're planning to do, do it soon so that recovery starts well before you start mortgage process.

Good luck with your new home! 

[Anonymous]

Paying does not reset SOL but setting up a payment plan DOES. 

Let's say you owe $1000. 

You can either:

1) not pay at all and possibly get sued during SOL and at a minimum have depressed scores until it falls off reports 

2) settle for less than $1000 which doesn't look amazing to some lenders

3) settle for full and try to arrange a PFD. Full settlement looks the best and PFD makes it like it never happened. 

4) Set up a payment plan with them to pay $200 a month for 5 months (for example). If you setup a payment plan this resets the SOL on the debt. You are entering a brand new agreement to pay X amount over Y months. Never do a payment plan for this reason unless the debt is FRESH. Always go for one time payment of either in full or settlement based on your goals and finances.

[Remedios]

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@Anonymous wrote:

Paying does not reset SOL but setting up a payment plan DOES. 

Let's say you owe $1000. 

You can either:

1) not pay at all and possibly get sued during SOL and at a minimum have depressed scores until it falls off reports 

2) settle for less than $1000 which doesn't look amazing to some lenders

3) settle for full and try to arrange a PFD. Full settlement looks the best and PFD makes it like it never happened. 

4) Set up a payment plan with them to pay $200 a month for 5 months (for example). If you setup a payment plan this resets the SOL on the debt. You are entering a brand new agreement to pay X amount over Y months. Never do a payment plan for this reason unless the debt is FRESH. Always go for one time payment of either in full or settlement based on your goals and finances.

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Getting sued would be terrible financially because they would be able to put bank account liens and garnish wages but judgement itself would not impact score at all due to an agreement between three CRAs to no longer include them. 

Settling doesnt look amazing, but guess what? It looks like person at least made an effort to meet their financial obligations.  It's always preferred to letting it just sit there like it's no big deal. It is a big deal, especially when it comes to mortgages. 

PFD doesn't work for most if not all original creditors. If you need further information, search for agreements between lenders and CRAs. Also, you might want to search for CRA's instructions on proper reporting. While some collection agencies do not abide by them, major lenders do. 

Setting up a payment plan does reset SOL, but if someone is serious about taking care of their debt, this should be a non issue. If one is not serious and continues to default, they will end up in financial distress and possibly sued by one or more entities. 

[Anonymous]

Yes. I agree with all these added points ^^^^^.

People should do what is most strategic not what is easiest when settling and resolving debt accounts. Not everyone should PIF and not everyone should settle. The route someone takes depends primarily on finances and timeline (how soon you may need to make a big credit move)

Starting a payment plan is often times the easiest but least strategic (benefits debt collector by resetting SOL and giving them more power). Sitting on debt is oftentimes the most risky (lawsuit risk) but sometimes most strategic if you have a plan to PIF or settle after you save for a few months. 

If possible a delinquent account should always be handled while it is still owned by the OC. If for one reason or another the debt was not handled before it was sold to a debt collector that has yet to inform the CRAs the delinquent account should be handled literally ASAP. If a debt collector purchased the debt and put a collection on credit there is much much much less urgency to handle the debt. Lawsuit risk increases exponentially for accounts over $3k. For debts under $2k at this point take a breath, figure out a plan and then execute. The damage has been done to the reports by now so primary goal in this situation should be a PFD of the collection account. 

Depending on which stage of the collection cycle someone is in determines what they should do. In the early stages (before or right after charge off but before new debt collector account) try to get rid of / handle it anyway possible but in the later stages of collection (after debt collector account) a different approach is usually most beneficial to the borrower.