Settlement in Full Vs. Payment in Full

The terms "settlement in full" and "payment in full" are terms that a consumer may find on her credit report in regards to the payment record on a closed account. For consumers dealing with old debts, these terms are important considerations when paying off an old account. A consumer should understand what these terms mean as well as the impact of the notation on her credit score.

Settlement in Full

A notation of "settlement in full" indicates that a consumer has paid a debt through a settlement. A settlement means that the creditor agreed to accept less than the full amount of the debt. For example, a credit card company may agree to accept $1,500 as payment in full on a $3,000 credit card account that is significantly past due. A creditor typically accepts settlements on old debt when the creditor believes collecting the full amount is unlikely.

Payment in Full

A notation of "payment in full" on a credit report indicates that a consumer has paid the entire amount of the debt. Though the account may have become past due, which the credit report will also indicate, payment in full means there was not a settlement. In some cases, creditors may agree to completely delete the account from a credit report in return for a full payment, especially for very old accounts. A deletion would remove a record of the account from a consumer's credit report, including the information that the account became delinquent. But in any situation regarding a legitimate debt, deletion is unlikely.

Impact on Credit

While a payment in full is more desirable than a settlement in full, payment in full is not significantly better than settled in full. This is because the consumer fell behind on payments, which the credit report will still note unless the creditor agrees to delete the account. However, after paying off an account through either method, the consumer can begin the process of rebuilding his credit score without the credit report showing an old debt that is unpaid.

Tax Concerns

If a creditor agrees to accept a settlement in full, damage to a credit score is not a consumer's only concern. The creditor may issue the consumer an Internal Revenue Service form 1099 for the amount of debt forgiven. Generally, the consumer must then report the amount as income on his taxes and pay income taxes on the amount. When negotiating a settlement with a credit card company it may be possible for the consumer to get the creditor to agree to not issue a 1099 for the amount forgiven, but the creditor may refuse to do this.