Should I Settle an Account or Pay in Full?

Unpaid bills often give debtors the unenviable choice of paying the account in full or trying to settle for a lower amount and dealing with the consequences of that down the road. Neither choice is correct in every situation. Your current income and long-term goals should drive the decision, such as if you want to borrow money in the future.

Benefits of Settling

If you need the maximum amount of money in your bank account, settling is the best option, because you sometimes get to pay 20 or 30 cents on the dollar. In addition, by agreeing to a settlement the creditor cannot pursue collection further, such as filing a lawsuit. Lawsuits often result in a lien on your property or garnishment of your bank account or wages.

Disadvantages of Settling

Settling debt lowers your credit score; how much depends on the starting point of your score and the rest of your credit history. A score of 780 drops to between 675 and 655 after settling a single account, according to Ellen Cannon of Bankrate.com. Assuming you want to obtain new credit as soon as possible, settling an account prolongs your return to an excellent credit rating. Also, the IRS taxes forgiven debt, so you must account for forgiven debt income when determining whether you can afford to pay a settlement.

Benefits of Paying in Full

Paying in full does the least amount of damage to your credit rating. Also, you have less legwork to do. Settling an account requires negotiations with the creditor, which you may not be prepared to do. Also, there is the chance that the creditor may want to keep you on as a customer if it sees that you will repay the debt in full, even if its takes you longer than the original agreement stipulated.

Tips

Take a look at your entire financial picture. If you want to pay off a creditor in full or settle a debt, you must have the finances to do either option while still meeting your other financial obligations. Defaulting on other debts keeps you in a cycle of debt and bad credit. Thus, you should talk to a financial counselor for at least one session. In some cases, bankruptcy is your best option, because you can wipe out unsecured debt and start anew.