Why a settled debt is still ‘past due’


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Dear Debt Adviser,
In the aftermath of my divorce and unemployment in 2009, I was unable to keep up with payments on about $9,000 of credit card debt. Eventually, I settled for about $4,500. Now, when I look at my credit report, the account is shown as closed, and that I settled the account for less than the full amount. But, it’s also flagged as more than 120 days past due. What should I do?
— Dan

Dear Dan,
I see that you have met my old friend Mr. Murphy. According to his law, not only will everything go wrong that can go wrong, but it will do so at the worst possible time. It sounds to me as though your credit report accurately reflects what happened to your credit card account. The past-due reference, along with the closed and settled notations, will remain on your credit report for seven years from the date of your last continuous delinquency.

A divorce can knock your life — and your finances — out of whack. It makes perfect sense to me that it’s reflected in your credit report. The good news here is a single negative account on your credit report is not unusual and is unlikely to have a huge impact on your life. The account is paid and well behind you at this point. Rather than look back, let me suggest that you look to the future and concentrate on rebuilding your credit.

Start by congratulating yourself on handling a difficult set of situations and coming out on the other side. Then I want you to make sure you don’t end up in a similar financial situation in the future. How do you accomplish that? Commit to saving money for the times when your income is interrupted due to another one of those unexpected life happenings such as the birth of a child, a layoff, etc.

I want you to work toward having six to 12 months’ of living expenses put aside in an emergency savings account. This will help keep the bumps in your financial journey from causing major problems. Have money deducted from your paycheck regularly and direct-deposited into an account. Also, add half of all future raises, promotions and windfalls to this account. Since you get to spend the other half, this should be doable over the long haul.

To get your credit in tip-top shape, pay your current credit obligations on time, every time and as agreed to add positive information to your credit report each month. Seek new credit only if you need it and it is included in your overall spending plan. I would recommend that you wait at least two years from the date you settled your account before you apply for a major loan such as a mortgage or car loan, if possible. By that time, the settled account will have less impact on your credit score, and you should have a better chance of qualifying for a decent interest rate.

One last thought: If you settled the account this year, you can expect to receive a Form 1099-C for the amount of the debt that was forgiven in the settlement. In most cases, you will have to add the forgiven amount to your income for the year and pay taxes on it.

Good luck!

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