How To Remove Settled Accounts From Credit Reports[yoast-breadcrumb]
How To Remove Settled Accounts From Credit Reports
Having a settled account on your credit report can negatively impact your credit score and make it harder to qualify for loans, credit cards, housing, and other financial opportunities. Even after paying off a settled account balance, the derogatory mark may remain for 7-10 years and continue hurting your credit. Fortunately, you can take steps under federal law to request removal of settled accounts. This guide covers the strategic dispute process to clean up your credit report.
What is a Settled Account?
A settled account on your credit report indicates that you negotiated to pay less than the full outstanding balance owed to a creditor. For example:
- You have a credit card with a $5,000 limit and $3,500 balance.
- You run into financial hardship and default on the payments.
- The credit card company agrees to accept $2,000 as payment in full.
- The reduced payment is considered “settling” the debt.
Creditors will often negotiate settlements so they can recover at least part of the bad debt they have written off. However, settled accounts remain on your credit report for up to 7 years from the date of first delinquency, damaging your credit.
How Settled Accounts Impact Your Credit
Having a settled account on your credit report indicates to future lenders that you did not fully repay a debt obligation. This raises questions about your reliability and financial responsibility. Specifically, settled accounts hurt your credit in a few key ways:
- Payment history – Settled debts show missed payments, delinquencies, and defaults.
- Credit utilization – Settling removes part of the debt amount, lowering your credit limits.
- Credit mix – Settling may cause closed credit accounts to drop off your report.
- Credit history – The original open date changes to the settled date.
One settled account can drop your credit score by over 100 points. Multiple settled accounts indicate serious financial problems and can reduce your score to “very poor” levels below 580. That is why removing settled accounts can significantly help restore your credit standing.
Negotiating Settled Account Removal
When settling a debt, the first step is to negotiate the removal of the negative item from your credit report as part of the payment deal. For example, a settlement letter may state:
I, [consumer name], agree to pay [creditor name] the amount of $2,000 on [date] to settle my outstanding debt of $3,500 on Account #xxxxxxxxxxxx. In exchange, [creditor name] agrees to report the Account as “Paid in Full” and remove any negative status on my credit reports within 30 days of settlement payment.
Get this agreement in writing from the creditor before sending your settlement payment. This provides legal standing to require the settled account be deleted from your credit report later.
Can a Settled Account Stay for 7 Years?
Yes, even with settlement and payment agreements creditors may choose to leave settled accounts on your report for the full 7 years from the date of first delinquency. They are within their rights to do so under the Fair Credit Reporting Act (FCRA).
Only positive payment information can be removed upon your request. Negative items like settled accounts may remain based on their reporting period. However, you can still dispute inaccuracies to potentially remove them.
Disputing Settled Accounts with Credit Bureaus
If a settled account remains on your credit report, submit disputes to Equifax, Experian, and TransUnion requesting investigation and removal. Under the FCRA, bureaus must look into disputed items and delete any that are inaccurate, unverifiable, or obsolete.
You can dispute settled accounts based on:
- Incorrect data – misspelled name, wrong account number, etc.
- Outdated debt – if the account is too old to be reported
- Lack of validation – no proof it was properly settled
Include the following in your dispute letter:
- Your identifying information
- List of disputed accounts
- Reasons for dispute
- Request to validate the settled accounts
If the bureau cannot verify the accuracy within 30 days, then the item must be removed. For more leverage, also dispute directly with the furnisher – the original creditor.
Requesting Direct Deletion from Furnishers
Under Section 623 of the FCRA, you can send direct removal requests to furnishers reporting settled accounts. Explain that you have paid the account and settled the debt, so the negative status is now obsolete. Furnishers must conduct reasonable investigations of disputes within 30 days.
Past cases under the 9th Circuit Court’s Llewellyn v. Allstate Home Loans precedent have ruled that furnishers must remove settled collections accounts when disputed. Use this precedent in your removal request.
Here is a dispute letter template to send to the furnisher reporting a settled account:
Re: Request for Removal of Settled Account [#]
To Whom It May Concern:
I am writing to request the removal of the above settled account from my credit report that you are currently reporting. This account was settled and paid on [date].
According to the Fair Credit Reporting Act Section 623, settled accounts should be removed from credit reports once paid, as they become obsolete. Under the precedent set by Llewellyn v. Allstate Home Loans, you are required to remove settled accounts upon consumer dispute.
Please conduct an investigation of this settled account and remove it from my credit report within 30 days. I have enclosed documentation proving the account was satisfied and settled. This negative item is no longer accurate or relevant now that the debt is paid.
Thank you for your assistance in correcting my credit report.
Send this letter via certified mail and keep records of your disputes. If the settled account is still not removed after 30 days, file a complaint with the CFPB against the furnisher for violating dispute regulations.
Special Case: Bankruptcy
If a settled account is included in an existing bankruptcy case, you can request the removal of the account since it is protected by the automatic stay. Send dispute letters stating that any reporting of the discharged debt violates federal bankruptcy law.
Under 11 U.S.C. § 524, furnishers and credit bureaus must remove settled accounts after bankruptcy. Failure to do so risks contempt of court orders.
How to Improve Credit After Settled Accounts
Removing settled items from your credit report is an important first step to credit repair. Once deleted, also focus on positive credit building strategies such as:
- Pay all current accounts on time – this helps payment history
- Lower credit utilization by paying down balances
- Add new types of credit – loans, credit cards, etc.
- Become an authorized user on someone else’s account
With time and positive payment behavior, your credit score can fully rebound after settled accounts. Just make sure to keep checking your reports for any other inaccuracies.
Getting Help with Settled Account Removal
If you need help disputing settled accounts, here are additional credit repair resources:
- Hire a credit repair company or lawyer
- Use CFPB online complaints against credit bureaus and furnishers
- Contact your State Attorney General
Don’t let settled accounts continue damaging your credit and finances. Understand your rights and leverage federal laws requiring credit report accuracy to improve your credit standing.