Can Debt Settlements Help Credit Card Judgments?

Debt settlement resolves credit card debt, usually for less than the full balance. Settlement is possible once a credit card becomes seriously delinquent -- usually after it is 90 days or more past due. Settlement is also possible on credit card accounts whose delinquency led to a debt lawsuit and court judgment. People settling credit card debt at that point are most likely trying to avoid bank or wage garnishment. The settlement helps with that, but not significantly in any other way. A judgment is a legal order by a judge ordering a defendant to pay a certain amount of money.

Considerations

Avoiding bank and wage garnishment is critically important for most people. Bank garnishment allows a debt collector to freeze the debtor's account so that the debtor does not have access except to deposit more money. Meanwhile, the debt collector has the legal right to withdraw money for the full amount of the judgment through a lump sum withdrawal or installments. Wage garnishment forces the debtor's employer to make regular deductions from the debtor's paycheck and send it to the debt collector on a regular basis.

Solutions

Some debt collectors may agree to a settlement that ends the threat of garnishment. However, a judgment gives the debt collector full leverage. The debt collector may insist on a settlement for the full amount of the judgment -- and an additional fee for agreeing to accept payments in monthly installments. A settlement is a voluntary agreement between the two parties, giving the debt collector the right to ask for whatever he wants. The debtor can refuse, but then could face garnishment.

Credit

Settling a judgment on a credit card debt does little to immediately help credit scores and ratings. Usually, settlements will not erase negative information on credit reports leading to the judgment. A person receiving a judgment for credit card debt suffers severe harm to credit because of negative entries on credit reports. They include multiple missed payments on the account, a charge-off by the creditor and another notation called a collection account that indicates assignment to a debt collector. The charge-off indicates the creditor closed the account for nonpayment. Those events combined can cause credit scores to plummet, with two or three years necessary in some instances for full recovery.

Exceptions

Some debt collectors may agree to remove some negative information from credit reports as part of the settlement agreement. That's known as "pay-for-delete." However, not all debt collectors participate in such arrangements. One credit report entry that the debt collector cannot erase is the judgment itself. Credit bureaus get that information directly from court records, and it will remain on reports for seven years. Paying a judgment results in an update to credit reports to show the judgment as a "paid judgment." Settlements cause updates to credit reports to show the account as "settled for less than the full balance," or something similar. Neither update significantly improves credit scores.