Settlement Agreements - Language

Often creditors will try to sneak in language that is undesirable. Among the most common tactics is to say that the debt is "forgiven," or something similar. Such language creates tax liability for the consumer.

This is very common following a bankruptcy, where a creditor continues reporting-erroneously-that a balance is owed and that a debt is in arrears and/or is a collection account. In that case, any settlement agreement should clearly state that a debt was written off in bankruptcy. Any language implying that a debt is "forgiven" enables the creditor to generate a 1099 at the end of the year, which it will provide to the IRS. It's best to specify in the agreement how any settlement amount will be reported to the IRS; otherwise the creditor will likely report it as income paid to the debtor, and the debtor will be required to pay taxes on said income.

Other language that I would always object to is something that doesn't provide a full mutual release. Only a full, mutual release is acceptable, and one that will offer additional remedies for refurnishing to the bureaus.

The following additional language can be useful, since it extends the release a step further: "Release Effective notwithstanding Discovery of Additional Facts. The Parties fully intend that the aforementioned releases are valid, effective, binding, and enforceable in accordance with their terms and the other terms of this Agreement, notwithstanding the possibility that any Party may hereafter discover facts, which, if such facts had been known by it as of the [Closing Date of this Agreement], may have materially affected its decision to enter into this Agreement, and accordingly the Parties hereby waive the benefits of any state or federal statute, law, order, or rule that would provide to the contrary."

Court Endorsement

The NCLC recommends that settlement agreements be signed by a judge whenever possible, yet this would depend on whether it is permissible in the jurisdiction and may also depend on the status of a case (this assumes that litigation has commenced). If any problems arise with the opposing party, the weight of a court-approved settlement would be helpful in convincing a credit reporting agency to comply with any terms contained within it.

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