Episode introduction
Steve Rhode: Hello everyone, I’m Steve Rhode, the old, authentic, original Get Out of Debt Guy, and with me is the new and improved Get Out of Debt Guy, Damon Day.
Damon day: Hey Steve. Improved – maybe a little, but I’m going for it.
Steve: Today we’ll tackle one of the most common questions people face when they’re behind on their credit card payments: should I accept a debt settlement offer? It sounds simple: They offer to make you pay less than you owe, but the decision could ripple through your credit, your taxes, and your peace of mind for years to come.
We’re going to unpack what really happens when a lender offers you a settlement, why they do it, how it affects your credit report, what the IRS might say about the forgiven balance, and how you can decide if this is really the right move for you.
The tax myth
Damon: Today we’re talking about that dreaded “I’ll have to pay taxes on forgiven debt.” The truth is, sometimes you have to pay taxes when your debts are forgiven, and sometimes you don’t. But what you need to do is research it and strategize in advance. If you settle and don’t realize you owe taxes, that’s a big unexpected bill you don’t want.
Why creditors offer settlements
Steve: Many people think that debt relief companies have a secret. The reality is that creditors offer settlement offers; they just don’t offer it initially if you’re the first to fall behind.
Right now, in 2025, credit card delinquencies are at their highest level in more than a decade. Lenders know that many people simply won’t pay in full. When an account is 90 to 180 days past due, creditors must charge it after 180 days for accounting purposes.
Damon: And I’ve heard people say, “If a creditor charges it, the insurance company pays them.” No. That’s a Grimm’s fairy tale. That doesn’t happen.
Steve: A write-off is merely an accounting matter. They can still try to get something back. A settlement is a partial payment that they can actually get, instead of waiting years or letting you go bankrupt and get nothing.
The timing game
Steve: If you’re current and your creditor calls and says you’ve had a bad time, you won’t get any settlement offers. With a delay of 60 to 90 days, internal collectors are still trying to collect. They will tell you, “we don’t settle debts.”
But after 120 to 180 days, when the bank is heading toward a loss, the bank’s goals shift from retaining a customer to getting something back. Then the offers start. Then the letters will arrive in your mailbox.
The fantasy of ’10 cents on the dollar’
Damon: I get people coming up to me and saying, “If I just don’t pay and wait long enough, I’ll get 10 cents on the dollar.” I’ve seen more people taken to court than I can count. All creditors are different: they behave completely differently, some are more aggressive, others less so. What Bank of America did last year could be completely different this year.
If you only have 10% to settle with, you should seriously consider bankruptcy. Your strategy of “I owe $100,000 and I’m going to try to settle for $10,000” means you’ll be taken to court.
Waiting too long
Damon: Waiting longer is not always better. Sometimes you wait too long and miss your window. You can’t rely on the general rule: ‘the older it gets, the better the deal.’ The older it gets, the worse the deal becomes and the more likely you are to be taken to court.
Win the war, not just the battle
Damon: Our goal is to win the war, not the battle. I have conversations all the time where we have a really good potential deal, but if we take it, the entire savings will be wiped out with eight other accounts behind it.
It’s better to get a deal that’s higher if you can afford it than a better deal that you can’t really afford. What’s the point of settling one account if three other accounts are turning aggressive and we have no money?
Settlement vs. Bankruptcy Credit Impact
Steve: The settlement will appear on your credit report as “settled for less than full balance” for up to seven years. But none of that matters because it’s incredibly easy to rebuild your credit.
Damon: If you’re in so much trouble that we’re considering a settlement or bankruptcy, credit score shouldn’t be your first priority. Your good credit got you into this mess.
Ironically, your credit can recover better and faster with Chapter 7 than with settlements, especially since bankruptcy is an end point there. It’s done. Settlements can take two to three years to raise the money. Credit will not begin to recover until the accounts are resolved.
Steve: Two years after my bankruptcy, I had a new mortgage at market rates. Because I was going bankrupt, I was able to save a down payment large enough to qualify for exceptional rates.
The tax information: 1099-C and Form 982
Steve: Once the debt is forgiven, you will receive a 1099-C from your creditor. The IRS considers forgiven debts as income: you borrowed the money, spent it, and didn’t pay it back. In my example of $10,000 for $4,000, you could get a 1099-C for $6,000.
But there is IRS Form 982, the insolvency form. If you were insolvent when the debt was forgiven, you would not owe taxes on that forgiven amount.
Damon: To be insolvent, your debts must exceed your assets. If you have a reverse mortgage, an upside-down car, $50,000 in credit card debt, $300,000 in student loans – add up the value of all your stuff. If it is a negative number, complete form 982. Every CPA knows what it is. If they don’t, get a new CPA.
Taxes don’t always mean a bad strategy
Damon: Just because you have to pay taxes doesn’t mean this is the wrong strategy. If you owed Chase $10,000 and just kept paying, you’d probably pay $2,500 a year in interest. If you settle and pay $1,500 in taxes on the forgiven amount, you’ll still save money.
A dollar is a dollar. Whether you give it to the IRS or to Chase, does it really matter to your bottom line?
Close
Steve: If you have more questions about paying off your debt, contact Damon at DamonDay.com.
Damon: Peace.
#settlement #Tax #tips