Will a Settlement With a Credit Card Company Hurt Others?

A settlement with a credit card company is an agreement to pay a credit card debt for less than the full balance owed. It is a tactic used for resolving delinquent accounts placed with a debt collector. SmartMoney reports that credit card companies typically settle delinquent debts for 20 to 70 percent of the balance. The exact settlement amount depends on the negotiating skills of the debtor and what the card company is willing to accept. Settlement with a credit card company usually only hurts the person whose name appears on the account. However, other persons, such as a spouse, may suffer indirect harm.

Credit

Credit card settlement could cause a significant drop in credit score. FICO credit scores range from 350 to 850. A person with a high credit score has more to lose than someone with a low score. Settlements appear on credit reports for seven years, according to the Federal Trade Commission. It is possible for a settlement to indirectly affect a spouse. For example, a couple planning to purchase a house might not qualify for the mortgage if one spouse's credit is severely hurt by credit card settlement. The same is possible for any other joint credit application, such as an auto loan.

Income Taxes

A couple could also suffer from an increased tax bill. In most cases, credit card companies must report debt settlement to the Internal Revenue Service. The IRS treats any money saved as income. For example, a person settling a $15,000 credit card debt for $5,000 must report $10,000 in additional gross income on the next federal tax return. However, the IRS allows exceptions for people who were financially insolvent at the time. Insolvency means the taxpayer had more debts than assets at the time of the settlement.

Closed Accounts

Some credit card companies regularly monitor credit reports to track the financial status of customers. If a card company notices that a debtor is settling debts, the company may arbitrarily close another account the debtor owns to prevent further charges. This could indirectly affect a couple because one spouse would lose access to credit. If it was a joint account that was closed, both spouses would lose access to credit.

Planning

People considering debt settlement should weigh the consequences and create a strategic plan before starting. For example, settling credit card debts in January is better than in December for tax purposes. A settlement in December could lead to a higher tax bill due just four months later in April. However, settling in January gives the debtor 15 months before the settlement becomes an issue on tax returns.