There are far too many myths floating around the world of consumer credit. The process and subsequent impact of settling derogatory debts with a debt settlement is no exception to that rule.
A debt settlement is the process where the debtor and the creditor agree on an amount that will satisfy the debt.
Although it has not been “paid in full,” the debt settlement allows for the creditor to be owed nothing more from the debtor.
This is when the myths tend to occur:
Myth #1: Settled debt is deleted from credit reports
Truth — Settled debt remains on a consumer’s credit report until it is required to be removed by federal law.
The Fair Credit Reporting Act, FCRA, governs virtually all things related to consumer credit including how long derogatory items can remain on credit reports. There is nothing in the FCRA that requires that an account be removed from a credit report just because it has been paid or settled. The credit reporting agencies are allowed to continue to report it until the full seven years has passed.
Many consumers attempt to negotiate “pay for delete” settlement arrangements with collection agencies. While “pay for delete” arrangements between consumers and collection agencies are not illegal under the FCRA, those deals violate the service agreements between the collection agencies and the credit bureaus.
If a collection agency gets caught granting “pay for delete” settlements to consumers, then the agency could lose its ability to report accounts to the credit bureaus altogether. Anyone who suggests pay for delete deals are common is misleading you.
Myth #2: Credit reports reflect unpaid balance on settled debt
Truth — If a consumer pays the agreed upon debt settlement offer then the balance of the account becomes zero and the credit report should be updated accordingly.
When a debt settlement, formally known as an “offer in compromise,” is agreed upon by a creditor and paid by a debtor the remaining balance on the account is forgiven. Once the debt has been settled the debtor owes no additional monies on the account UNLESS he or she foolishly agreed to be liable for the deficiency balance.