How Does Debt Settlement Affect Your Credit Score?

If you owe the IRS money and aren’t sure how you will pay your debt, you may worry about how this affects your future. The financial hardship you face could be made worse if your credit score lowers and you are no longer eligible for great interest rates on other products. But does tax debt settlement affect your credit? What can you do to keep the damage minimal and to protect your financial future?

In fact, what you owe the IRS isn’t recorded in your credit report, and it won’t affect your score directly. However, a failure to pay can have indirect effects, especially if a lien is placed on your property. Settling your debt with the IRS, whether this is through an offer in compromise, currently not collectible status, or an installment agreement, could allow you to resolve the issue and prevent negative consequences.


Since 2018, tax debt doesn’t get included in your credit score, and rating agencies aren’t allowed to mention it. In this way, you won’t be punished even if you have significant tax debt, and your other creditors don’t need to know about it. This is true for everyone who is able to pay on time, but you might be indirectly affected if you are unable to settle your debt with the IRS.

If you have over $10,000 in outstanding tax debt and you haven’t paid even after repeated collection attempts, the IRS may place a federal tax lien on your property. This means that they have a legal right to claim your home, income, savings, and other assets unless you pay the outstanding amount. Your lien information is public, so creditors might find it and refuse to lend you money as a result. Settling your debt with the IRS can relieve you of this issue.

Offer in Compromise

One of the best solutions is an offer in compromise. This is an option for anyone who has some income and assets but not enough to pay the full amount. Together with your tax specialist, you will figure out what the highest amount you can pay is and then offer it to the IRS. If they agree that you can’t reasonably be expected to pay more, they will accept, and you can benefit from the lower payment.

If there is already a federal tax lien on your property, this will be removed once an offer in compromise has been accepted. As a result, your credit will improve again, and potential lenders won’t be able to find any negative information about you anymore. In addition, you will no longer have to worry about your assets being seized by tax collectors.

Currently Not Collectible

Some people struggling with tax debt have no income and no assets that could be sold to pay it. In such a situation, you may be eligible for currently not collectible (CNC) status. This demonstrates to the IRS that you are not currently in a position to make payments, and all collection activity will cease. However, CNC doesn’t have the same positive effect on your credit score as an offer in compromise.

Although you are not obligated to pay while under CNC, you may have to settle your tax bill later, when your situation has changed. Thus, the federal tax lien won’t be removed from your record, and interest and penalties will continue to accrue on your debt. Your tax specialist can let you know whether this is an option for you, but it is usually preferable to make an offer in compromise, which allows you to resolve your situation instead of just postponing payments.

Installment Agreement

Some taxpayers have enough income to eventually come up with the entire amount outstanding, but they need more time to access the money. An installment agreement is perfect for them because it allows them to spread out their payments over many months or even years. If you are at risk of a lien, you should immediately start negotiating your IA with the IRS because it can stop the problem in its tracks.

What’s more, this payment option isn’t considered a loan, so it won’t be included in your credit report. Your score won’t be affected by it, which can make it more attractive than using a credit card or another form of debt to pay for your taxes.

Using Credit to Pay Taxes

Despite the fact that installment agreements are often best, some people opt to pay for their taxes using a personal loan or a credit card. Because these are considered debt, they will be reflected in your credit score. For example, if you are maxing out your cards, your score might lower because lenders believe you are not a responsible borrower.

It could be sensible to spread your payments over multiple cards in an effort to keep your borrowing to under 30% of the available amount. Alternatively, you could take out a personal loan, which is sometimes cheaper than a credit card. No matter what you do, keep an eye on the fees you will accrue, and check whether you would be better off with an installment agreement.


Every taxpayer is different, and you will need the help of a specialist to determine the best debt settlement strategy for you. Before you get in touch, compile as much information about your income, expenses, assets, and tax debt as you can. This can give you a better idea of how much you will be able to pay off and which IRS forgiveness program could work best.

Even if you already have some ideas, you should contact your specialist as soon as possible because they have the most up-to-date tax information and will be able to advise you. Maybe there is an option you haven’t considered yet that could prove more advantageous for you.


To find the best professional to work with, you should first have a look at various providers’ websites. Check that the employees are highly experienced and that they have positive testimonials from previous clients. The best firms will also provide you with some important information for free, either through a newsletter or blog posts.

Once you’re satisfied that a firm could be a good fit, you should give them a call and book an initial consultation. Speaking to your tax specialist is the best way of figuring out whether you want to work with them long-term. You will be able to assess their communication style and competence.


Debt settlement doesn’t affect your credit score directly, but it can improve your chances of getting good interest rates and being approved by lenders. This is because the IRS will take the federal tax lien off your property as soon as you’ve come to an agreement with them. If you have trouble paying your debt, you shouldn’t delay filing for currently not collectible status, making an offer in compromise, or setting up an installment agreement.

An experienced tax resolution specialist can help you sort out your situation. They have experience with cases similar to yours and will be able to advise you on which option is best. Then, they will negotiate with the IRS and file your paperwork for you, so you know it has been completed correctly. Call or message us now at Geaux Tax Resolution to speak to one of our professionals and discover how you could protect your credit.

Share on:

Leave a Reply

Your email address will not be published. Required fields are marked *