Is there any way to get a creditor to remove the “charge off” from my credit report?

We received the following question from a user:

I received an offer from a creditor, the settlement amount is 40% of the total owed. Is there any way to get the creditor to remove the “charge off” (from my credit report) that they have already done on my account and replace it with “settlement/balance resolved/delinquent?

Here’s what Jeff Jenkins had to say:

Even though a creditor has “charged off” a debt that you have and it appears as such on your credit report, that doesn’t stop them from changing the “charge off” language to something like “settlement/balance resolved/delinquent” if you are able to make a deal with them to pay some agreed upon percentage of what you owe. Having the creditor change this language on your credit report could be part of your arrangement with them. In other words, if you pay them the percentage that you agree upon with them, part of their obligation would be to alter your credit report as indicated above.

Regardless of what the creditor puts on your credit report, if you make a settlement with a creditor to pay them less than what you owe, they will absolutely file with the IRS a document that indicates that the portion of the debt that wasn’t paid has been charged off. The creditor does this so that they can use this charged off amount to offset ordinary income they have during that period of time. Unfortunately, the IRS sees forgiveness of debt the same as realization of income. So, if the creditor forgave $6,000 in debt, let’s say, because you made a deal with them to pay the balance in complete satisfaction of the debt and they file a document with the IRS saying that the balance that you owed them was charged off, the IRS would see this as the same thing as you earning that amount of money and would tax you on the sum that was charged off.

Not only would the IRS be asking for taxes to be paid on that sum of money that was charged off, but the State would as well. A lot of people don’t understand this and think that if they pay 40% of what they owe and the creditor agrees to accept that in satisfaction of the debt that all obligations regarding that debt are gone. Wrong! They are still going to end up paying State and Federal taxes on the amount that was not paid to the creditor. Creditors are not going to tell you that, nor are, generally, companies who try to help you by renegotiating how much you owe. This unanticipated taxation of the charged off amount is something that will absolutely happen, but don’t count on the creditor or anybody who might be helping you negotiate the debt explaining this to you.

If you file a bankruptcy and the debt that you have with this particular creditor is discharged, you would not have to pay any taxes on the amount that was discharged, provided that there was no charge off and notice to the IRS and levy of a tax amount prior to the filing of the bankruptcy.