I have generalized consumer debt – regular credit card stuff, with $2,632 in charge-offs since June 2019. My delinquency was first reported on June 1, 2019. It’s still with the original creditor, which is Wells Fargo. Sounds like my only options are a settlement or to pay in full. I have the option to pay in full. Am I supposed to negotiate anything or just go online and pay it?
— Ryan in Colorado Springs
Howard Dvorkin, CPA responds…
Yes, both options are possible. But one is better (and cheaper) than the other.
First, let me explain exactly what’s going on here. Many people don’t know what a “charge off” is until it happens to them. It’s not pretty.
It sounds like “charged off” should mean “gone away.” It doesn’t. It’s still around, and it can still do serious damage.
In fact, if this happens to you, it’s the worst of both worlds. First, your credit card is frozen. You can’t charge anything else on it. Second, you still owe the money. Even worse, you’re not even allowed to make minimum payments – yet the credit card issuer might continue to report the amount as past due.
Once a charge-off goes on your credit report, it can say there for seven years. Obviously, this isn’t a good thing.
If you can pay off the debt in full, you will prevent it from being reported as bad debt – and it will show that way on your credit report. Another upside: You won’t have to deal with the IRS.
How charge-offs can lead to added taxes
One thing I didn’t mention about charge-offs (because they’re complicated) is that the IRS gets involved. You might owe taxes on the debt. This also isn’t a good thing.
You also mentioned debt settlement, Ryan. This is also a tried-and-true option. Remember how I said charge-offs were complicated? So is debt settlement. First, you need to avoid debt settlement scams. Second, you better get familiar with terms like “pay for delete” and “re-aging.” Third, you need to be patient, because debt settlement can take 18 months to four years. Fourth, you need to be OK with the settlement dragging down your credit score for seven years.
The right time to use debt settlement
Debt settlement is a real option for some struggling people, but it doesn’t sound like you’re struggling right now, Ryan. Of course, that’s the final piece to this puzzle. Decisions like these aren’t made in a vacuum. If we were meeting to discuss this, I’d ask about the rest of your life. While you have the money now to pay in full, do you have anything else saved? Are you facing big expenses coming up? Is your job secure?
Before you decide on this one issue, Ryan, look at your entire financial picture.
