How do Negotiated Debt Settlements work?
Most creditors are willing to negotiate the settlement of old debts that are in a collection status or have been charged off. Often they will settle for a fraction of what the consumer owes in a lump-sum transaction but the amount of the creditor concession is likely to be reported to IRS as imputed taxable income. Nevertheless, settled debts will be reported on your credit reports as “Satisfied” which will improve your credit rating.
