Settling on debts in collections before investing

11 Replies

Hello guys just need to get some advice as for my route to getting ready for investing in real estate. I feel like it would be a good idea to clear all my personal debt before I even begin. I'm 27 and I had a student loan for 33k in collections I just recently settled on it for 8k was this the right move? Will negatively impact my credit? should I be trying to pay full balances or just settle on everything as low as possible? removing this debt just cleared about half of all my total debt? Should I just be really aggressive clearing things up this year as far as debt goes or should I just focus on saving for a down payment on a rental property? I had a 620 credit score before this collection settlement Im hoping this doesn't negatively effect my score even more. in hindsight I guess I should of asked this before I settled on the debt but it was driving me crazy.

This is a hard question to answer without knowing the rest of your monthly finances income/expenses. And what strategy are you looking to invest in buy & hold? flipping? How are you going to be paying for the properties?

Not sure if its possible to do this with your particular lender/loan, but I would attempt to get the creditor to agree to do a pay for deletion, where they agree to delete the record of the loan from your credit report in exchange for your payment. There are other forums about cleaning up credit that go into this in great detail.

Getting these things deleted would greatly increase ones chance of getting loans, and getting them at a better rate.

@Eddie T.

Now that I have cleared up that loan payment, my monthly expense come to about 2200 my monthly gross income varies month to month from 5k to around 6400. I want to buy and hold long haven't given much thought to flipping but wouldn't rule it out.

As far as financing goes not sure which bank would approve me I have a 620 fico on credit karma not sure how accurate that is. I might mention as well that paying off that loan put a huge ding in my savings so I guess I should start rebuilding it again.

Any other advice or guidance would be greatly appreciated thanks in advance.

I don't know the answers to all your questions, but I can tell you that settling a debt does count negatively against your credit for at least 5 years. However, it looks better than an unpaid loan.

Also keep in mind the new IRS laws on settling debt. If you settle for less than you owe, you have to pay income taxes on the amount that was forgiven.

A lot of lenders will look negative on someone who defaults on student loans or settles for less than what they owe, which means you left the taxpayers with the balance. Good luck.

Joe Gore

In order to have positive affects on your FICO (or any of the credit models) you will need to have positive trade lines. A "positive" trade line is one where you owe a debt and pay as agreed. In general, those types of trade lines will have more influence on your score the better they sit on your credit. So accounts where you carry the max balance (but pay on time as agreed) will have positive but lesser affects than that of an account with half of the total credit extended being used (or have been paid back). You never want to close these trade lines. Having positive credit helps your score. The general ideal balance is at or below 50% of available credit. If you close the line, you remove the positive affects since the line is not there to add them.

When you settle any debt for less than what is owed two things happen. You are simultaneously doing two things. Creating a positive attribute, by removing the total debt owed and settling the account for less than what is due. Settling for less than what is due is a negative attribute, since the creditor didn't get all the money back.

The way those (or any feature) actually weight into the calculation to produce a score are not known as they are proprietary. For that matter, the exact equations and metrics are closely guarded secrets, don't let anyone tell you different; nobody knows EXACTLY, any of the metrics. This also creates different affects on different folks, so what made John's score rise, may not make your score rise in the same way or the same amount. Same in terms of negative affects.

Time is the most effect metric in reducing the affects of negative trade lines. Since most of the time negative items are not updated on an on-going basis by the creditor. If you have a charge off from the past, the affects are minimized the further into the future you go from the date of the last reporting to the agency. So a derogatory line from 10 years ago (according to the date reported to the agency) has less of a negative affect than one from 2 years ago. The same is true with positive lines.

When it comes to derogatory lines, often times when you update that account by paying it off, regardless of paying less than what is owed, it will have a negative affect on your score. This is because the reporting of the event is brought current in time. A similar thing happens sometimes when folks attempt to correspond with derogatory creditors, challenging the line or alike. If the creditor responds they may update the account which has not been reported for a long period of time and then the current update will carry more weight than it did when the date was in the past. This will push the score down.

That is not to say that clearing up derogatory trade lines is a bad idea. It is not, it is a good thing. Even settling for less than due is better than not settling. However, if this is something you wish to do, you would be wise to give yourself a couple of months to allow the records to update and season to find the score equilibrium. Many times folks go mess with their credit right before a credit even and that can have dyer consequences even though the intentions are good.

Keep in mind, not all creditors report to the agencies. (There are 3 - Equifax, Trans Union and Experience) Not all report every month. Not all report to all three. There is nothing you can do about this, it is their decision. In converse, not all creditors pull all three agencies to extend credit. Major credit like auto and home loans do review all three.

This is one of those topics where everyone has an opinion and usually there opinion is based on their dealings with the same. THOSE RESULTS MAY NOT BE YOURS. So, for instance, not picking on anyone, the trade line paid which caused 5 years of negative affects is unique to that person and the creditor. The particular line and other lines (good and bad) on the credit are not disclosed so it really can't give you any bearing of meaning.

Many times when you pay a line off, the creditor will no longer report so the impact on your score fades with time. Some will still report on an on-going basis in some interval. Like perhaps an auto lender. Every month they include your account in the batch that goes to the agency. Even though you may have settled, let's say for less than what is due, since they report each month the impact is updated each month. It is because of that type of idea that everyone's credit will to some degree respond differently to events. The same applies to positive lines. Maybe your auto loan is at 30% of the original balance but they do not report each and every month. So months with the most recent reporting will carry better impact. So if you have a positive which reports bi-monthly and a negative which reports monthly you will see variances through a series of months.

It is not possible to carve out all the in's and out's of the scoring models. They do that on purpose. If the public actually knew how it all worked, it would not do much good for creditors since the public would manipulate it.

Some of the credit agencies offer programs for a fee where you can get an idea of what would happen if you paid down or off or closed various trade lines. Those reports come from national credit vendors.

Not all credit is simply score driven. Mortgages which qualify for Fannie or Freddie placement use a credit score to establish a guideline parameters but a loan ran through DU will analyse the credit line history, not just the score. The obvious example of this would be someone who obtains new credit but retains a high score. If Discover gives you a $50k credit line and then you want a mortgage, you may get a lesser approval since even though credit was just established, the perceived risk is high since you have not used or maintain the credit.

Much of what you will hear about credit inquires impacting your score will not be accurate. The agencies expect consumers to shop around. As such, there are grace periods where similar inquires do not impact. Such as shopping for a mortgage. To properly shop, many different lenders will need to pull your credit report. This is permissible without impact. There is also a timeline for a one time update to the score, which is a typical underwriting event.

The main idea, there really is, use your capacity to get free copies of your report. You get one each year. To see where you stand. Plan ahead if you can to deal with positive and negative trade lines. Do not overly "fiddle" with your report. Making multiple inquires. Be cautious when dealing with a trade line that is dated (in the past) as it may bring itself current and negatively affect you. In order to be credit worthy, you must carry credit. Do not close out lines of credit, especially the "good" ones, with lower balance ratios to credit extended for the sake of trying to improve anything. Do not shop for major credit items at the same time. So, either get a house or a car at different times not the same.

Remember, qualifying for a mortgage is not just about credit score. Income and assets also play into the game.

The idea that a balance write off from a creditor may become a taxable event according to the IRS for the borrower is not new. During the mortgage crisis the threshold was raised for mortgages, but now it is back to what it use to be.

Student loan debt do not carry the impact as implied above. Further, not all student loans are owned by Sallie Mae, some are privately owned. There is another example of opinions which may be misguided.

If you have a defaulted student loan, the Mortgagee will demand the account either be cured in full or brought current. Student loans in deferment can be removed from DTI calculations manually.

If the student loan creditor agrees to take less than the balance due, this may affect your score but will not affect a view in underwriting aside from your score.

I really wouldn't spend another second worry about it.

Yeah, I'm afraid you should have thought of this before, but it's water under the bridge now. Yes, your credit will take a big hit from a settlement. And yes, it will improve again with time. I would NOT suggest doing more settlements. One you can explain to a lender. More than that, you're broadcasting "Hey, I borrow money and don't care if I ever pay it back!"

Best scenario, IMO, is to buckle down and get those other debts paid down. It sounds you have around 30k in debt left? It also sounds like you can apply 2k a month to it, so you could have it completely gone in 17 months or less. That's nothing! Use the time to educate yourself about real estate, and get your credit score back up. You'll do smarter deals and get better financing by waiting a bit.

here's a payoff calculator:

I also suggest looking for an owner occupied duplex/triplex/quad for your first purchase. Good luck!

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