Paying Off Debts That Are in Default Won’t Always Improve Your Credit Scores.



What is a Collection?
An account that is 90-days past due.

What is a Charge-Off?
After 180-days past due, the creditor deems an account uncollectable and writes it off for their tax purproses (however, you still owe the money). In either case, creditors may attempt to collect the debt, hire a collection agency, or sue for judgment.

Paying a Collection or Charge-Off
will not remove it from your report. In fact, it will continue to report for 7 years from the date the account first went delinquent with the original creditor.

Removal Strategy:
Some collection agencies will remove the account from your credit report by paying it in full – IF YOU ASK THEM NICELY. However, since it’s a verbal agreement, you won’t be able to do anything if they don’t keep their word.

No Notice Required:
Collection agencies aren’t required to notify you when they receive a collection account from a creditor. Nor are they required to notify you when they report it to the Credit Reporting Agencies.


happen when you’re sued in court and lose the case. The result of a judgment is a debt you owe to the party who sued you.

The Debt From a Judgment Means
(a) you won’t be able to obtain mortgage or business financing until the judgment is satisfied;
(b) unlike collections, judgments allow the winning party to garnish your wages and/or bank accounts.

To Satisfy a Judgment
(a) pay the debt to the party who sued you;
(b) obtain a signed & notarized satisfaction form from that party;
(c) file the satisfaction form with the clerk of courts. The court usually reports to the CRAs in 30 days.

Judgments Report For 7 Years
from the date they are filed, whether paid or unpaid.


Tax Liens
are filed by the government when you haven’t paid your taxes. Unpaid tax liens remain on your report for 15 years from the filing date (unpaid tax liens will prevent you from getting a home or business loan). Paid tax lies remain for 7 years from the paid date.

Removing Federal Tax Liens:
(a) Pay the lien;
(b) Apply for a withdrawal of tax lien – IRS Form 12277;
(c) Once approved, the IRS will send you a Withdrawal of Federal Tax Lien – IRS Form 10916c;
(d) Send that form to the CRAs. Then, the CRAs must remove the tax lien from your credit report.


Chapter 7 Bankruptcy:
Wipes out most debt (excluding taxes and student loans), yet remains on your credit report for 10 years from the date it was filed.

Chapter 13 Bankruptcy:
Allows you to pay back a discounted amount of your unsecured debt over 3-5 years; it reports for 7 years from the date it was filed.

Score Impact:
A bankruptcy will greatly reduce your scores at first, but after 2 years the impact is fairly small. Both Chapter 7 & Chapter 13 bankruptcies report to the CRAs even if the BK was dismissed or discharged.

Applying For a Mortgage?
Bankruptcies in the past 4 years can affect mortgage financing. Loan programs vary, but expect to wait at least 1-2 years before being able to buy or refinance a home.

Mortgage Loans Are Included
in a Chapter 7 bankruptcy unless the lender and homeowner sign a reaffirmation agreement prior to discharge. If not reaffirmed, a $0 loan balance will show on the credit report and no future monthly payments will be reported. If the homeowner stops making payments, the mortgage agreement allows the lender to foreclose and collect the balance owed.



  • Collection
  • Charge-Off
  • Judgment
  • Tax Lien


The age of the debt is the main factor on scores. After 2 years, the impact of a defaulted debt greatly diminishes. Hence, paying debts over 2 years old improves scores very little (2 to 5 points). For collections & charge-offs, it’s the date the original account first went delinquent. For judgments and tax liens, it’s the filed date.


Whether the debt is $5 or $5000, the score impact is the same. However, paying a defaulted debt to a zero balance will improve the score (if the default was less than 2 years ago).


Whether you pay a defaulted debt in full or settle it for a lesser amount, the account is updated to report a zero balance. Any comment on the report about settling an account for a lessor amount does not affect the score.


Some creditors and collection agencies report to only 1 or 2 of the CRAs. This often results in drastic variations between the scores you have with the 3 CRAs.

Credit Scoring Basics

GreenBayGreg of Dellaire Realty interviews the president of Credit Matters, Dan Krueger, to discuss the basics of credit repair and credit scoring.