Definition of Settling Debts

• Settling debts is an option in dealing with past due balances owed to credit card companies and lenders. Settling debts or a debt settlement refers to satisfying an account balance, but paying less than you owe. For example, you might owe your credit card company $6,000, but settle the balance for $3,000. Not every debtor can acquire a debt settlement. Creditors and lenders require full repayment of balances. However, if a debtor defaults on payments and contemplates bankruptcy due to financial issues, some will settle balances in order to recoup some of their loss.
  
  

Definition of Write-Off

• A write-off (also called a charge-off) is another method used by creditors and lenders when dealing with past due balances. A write-off only occurs after a debtor completely stops payment on a debt. Creditors and lenders may telephone and write letters to encourage payments. If a debtor does not resume payments, it's standard for them to write-off the debt after about six months. For example, if a borrower defaults on a $7,000 debt, lenders can deduct or report this amount on their taxes as lost income to reduce their company's tax liability. Written-off accounts are often sold to collection agencies, who then continue collection attempts.
  
  

Pros and Cons of Settling

• Debt settlements can alleviate debt problems and give you the chance to start over. The negotiation process is often lengthy, and some creditors and lenders will not consider this option. While settling debts eliminate balances, this option can have a negative effect on your credit score. Not completing your debt obligation by paying lenders and creditors the full balance due prompts them to update your credit report with the notation, "settled for less than owed," or other similar wording. Credit reports describe your entire credit past. If you apply for a new loan shortly after a debt settlement, having a settled account on your file can trigger a rejection. Creditors and lenders are sometimes reluctant to approve applicants who didn't fulfill past obligations.
  
  

Consequences of Write-Off

• Ignoring a debt and then waiting for a lender or creditor to write-off the balance isn't a good way to handle unpaid balances. Write-offs don't disappear easily; and once a creditor or lender reports the write-off to the bureaus, the information stays on your credit report for seven years -- even if you later decide to satisfy the balance. A written off account can stop mortgage approvals, or trigger a higher interest rate on credit cards, car loans and other types of financings. In some instances, getting approved for financing is subject to contacting old creditors or collection agencies and paying off delinquent accounts.