Ask an Expert: Should I Settle My Car Loan?

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By Bruce McClary: 05/17/2021

This week’s question: I had a car repossessed 2 years ago and the finance company recently sent me a letter offering me a settlement offer that would allow me to settle my account in full. The amount they are willing to accept is about 30% of the balance owed. How should I go about rebuilding my credit and resolving this repo? I’ve heard that paying a settlement offer doesn’t always improve your credit.

There’s some truth to what you’ve heard about debt settlements in general. Settling your debt is usually considered a last resort strategy because of its adverse effects on credit. And creditors will notice that you breached your contract and did not pay what you owed in full. However, in some cases, settling a debt can be a permanent solution to deal with a debt that you couldn’t otherwise pay off. When you settle a debt, your account balance is brought to zero and reports as “settled in full,” allowing you to start rebuilding your credit.

How a Settlement Affects Your Credit

When it comes to how a particular action affects your credit, there’s no way to determine how much your score can increase or decrease. It all depends on how high your credit score is when the event happens. The higher the score, the more severe the damage. Since you defaulted on your loan two years ago, there’s probably some extensive damage in your credit already. This includes a history of missed loan payments, the defaulted loan and any collection activity on this account. Although paying a loan in full would be the best alternative, it won’t give you the credit boost you expect. Your negative credit history will remain on your credit report for seven years after the day of the last activity on your loan. So, in comparison, a debt settlement would be a better option than not paying at all, and depending on your credit, slightly worse than paying your car in full.

Another thing to keep in mind when considering if settling this loan is right for you is that credit scoring models favor recent information more favorably. So the adverse effect of any negative information you have on your credit reports will diminish as time goes by.

Debt Settlement Beyond Your Credit

Most people worry about how debt settlements will impact their credit. But, settling debts have far-reaching consequences that could be costly to consumers. Whenever a lender forgives a portion of your debt greater than $600, the IRS will collect taxes on the forgiven amount. After you pay the debt, the lender will send you a Form 1099-C with details about the forgiven debt. To determine how this could affect you, ask a certified tax advisor.

Start Rebuilding Your Credit Today

Improving your score after a repossession will take time. It would be best if you focused on adding new positive monthly activity to your credit reports. The most important thing to do is to always pay all your other accounts on time and focus on keeping your credit card balances low. You should also avoid getting new credit unless it’s essential. Your credit journey and rebuilding strategy will be unique to you and your current circumstances. So, I encourage you to work with an NFCC Certified Financial Counselor to review personalized strategies and create a plan to find the right solution for you. Good luck!


Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

530 W Allegan Street, 7th Floor
Lansing, MI  48909-7720

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