What Happens If I Accept a Title Loan Settlement?

Accepting a car title loan settlement can be an important financial decision – especially if you’re trying to resolve a past-due account, a legal claim, or a charged-off account. 

Before you accept a settlement offer, it’s a good idea to understand how loan settlements work, what the legal implications are, how they’re reported to the credit bureaus, and what that might mean for your taxes. In this guide, we break down the practical outcomes of accepting a title loan settlement, explain potential credit and legal impacts, and outline tax considerations. We’ll also highlight key factors to consider so you can choose the path that best fits your situation. 

If you need help evaluating repayment strategies or resolving a past-due account serviced by LoanMart, contact us at 888-700-2239.

Understanding Title Loan Settlements

A title loan settlement is an agreement in which a title loan borrower and lender or loan servicer resolve an outstanding vehicle-secured debt for less than the remaining amount owed on the account. Instead of continuing to make payments on your title loan based on the original repayment schedule, the lender or loan servicer proposes a payoff that the lender accepts as a final resolution. Typically, this is done through a lump-sum payment, but title loans can also be settled through a revised payment plan. 

For borrowers who wonder “What happens if I accept a title loan settlement?”, the primary legal outcome is that the account is closed once the agreed upon sum is paid. However, there are often credit reporting and tax implications that borrowers should keep in mind.

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The Settlement Process

Here’s how the title loan settlement process typically works: 

• The title lender or loan servicer makes a settlement offer, often at the borrower’s request. 
• If both parties agree to the settlement, a written settlement document will be made available to the borrower for signature. The settlement will override the original title loan contract, and spell out the settlement amount, payment deadlines, and legal implications. 
• Once you sign the title loan settlement agreement and make the agreed upon payment(s), the title lender or title loan servicer updates the account status to “settled for less than the full balance” or “paid-settled”. At that time, your loan account will be closed, and collection efforts will stop. If your title loan was in default at the time of your settlement, but your vehicle had not been repossessed, you get to keep your vehicle and the title will be released to you.
• There are likely certain legal consequences of accepting a settlement offer from a title loan lender or servicer, which can include tax impacts and waiving any rights to file a lawsuit related to the account serviced by LoanMart.

Title loan borrowers choose to seek and accept loan settlements for various reasons, including a permanent change in their income, the desire to end collection activity, and the desire to clean up their credit in anticipation of applying for a different personal loan or a mortgage. 

That said, you should weigh the pros and cons of a title loan settlement before accepting one. If you’re considering this path, contact us to discuss your options.

Depending on your individual situation, here are some of the potential consequences of accepting a loan settlement:

Impact of a Title Loan Settlement on Your Credit Profile

Accepting an auto title loan settlement might affect your credit, if the title lender or loan servicer reports loan performance to the credit bureaus. Because the loan account will be reported as “paid-settled”, some lenders and scoring models may weigh that negatively when you apply for credit. On the other hand, some other lenders may consider a settled account better than one that remains significantly past-due and in default.

In terms of credit reporting, settled accounts are usually marked as “settled,” “settled for less than the full balance,” or “paid-settled.” This information can remain on your credit profile for years. While this account status usually isn’t as favorable as an account that shows as “paid in full,” many lenders will view it more positively than an account left in collections. Over time, resolving outstanding debts and title loan accounts through a settlement can thus support financial stability and potentially rebuild your credit.

Potential Tax Consequences of Title Loan Settlements

Tax treatment is another important consideration when deciding whether or not to accept a settlement. In many cases, the portion of debt that’s forgiven may be treated as taxable income by the IRS. For example, if you settle an $8,500 loan for $5,000, the $3,500 forgiven amount could be considered Cancellation of Debt (COD) income. While there are some exceptions to that related to certain bankruptcy proceedings or loans made for business purposes, it’s important that you understand whether or not a title loan debt settlement might create a tax liability for you!

If $600 or more is forgiven, the title lender or loan servicer may send you IRS Form 1099-C, Cancellation of Debt for your taxes. Be sure to review the form closely and report the amount correctly on your federal tax return. Even if you don’t receive a 1099-C, you may still be responsible for reporting the forgiven debt. Keep copies of the settlement agreement, payment confirmations, and correspondence with the lender or title loan servicer to support your records.

Because tax outcomes depend on your personal circumstances, consider consulting a tax professional before accepting a settlement for a title loan serviced by LoanMart. 

Financial Implications of Accepting a Title Loan Settlement

When considering what happens if you accept a car title loan settlement, compare the immediate financial relief to the potential longer-term impacts. Settling may significantly reduce the outstanding title loan balance you need to pay, but it can also introduce other considerations as mentioned above. 

It’s worth comparing settlements to alternatives such as a loan extension, loan modification, or potentially refinancing your loan. These options may also allow you to catch up with any past-due tile loan payments while allowing you to preserve your credit standing and not having to worry about tax and legal implications. Adjusting title loan terms – like the repayment period, interest rate or monthly payment can make obligations more manageable without the negative trade-offs that often accompany settlements. For eligible borrowers, staying current on a revised plan may be more supportive of long-term goals than accepting a settlement, especially if your priority is future financing at competitive rates. 

As a borrower, being clear on each of the settlement terms is essential. Verify the total amount due for the settlement, the due date of the lump-sum payment or the payment schedule if you are making multiple payments, and make sure the required payments fit your budget. Confirm how the lender will report the settlement to the credit bureaus and ask what happens if an installment is late or missed since settlement agreements may be voided if the agreed-upon payments are not made according to schedule.

Potential Legal Implications of A Title Loan Settlement

While considering whether or not to settle your auto title loan, understanding the legal implications is also useful. The primary legal consequences upon accepting a settlement offer and making the agreed-upon payment(s) include:

• That your title loan account will be closed
• The lender or loan servicer will have no more legal right to your vehicle, and you will not need to worry about any collection lawsuits
• If there is still lien on your vehicle related to the title loan, it will be released
• The borrower will waive the rights to file a lawsuit against LoanMart and the applicable title loan lender

Considerations Before Accepting a Settlement

Before deciding whether to accept a car title loan settlement, here are some helpful steps you can follow:

• Be sure to weigh the potential pros and cons and make a decision that’s best for your individual circumstances
• Assess your finances honestly, and make sure you can afford making the settlement payments on time
• Be sure to consider the tax and legal implications of settling your title loan 
• Explore all alternatives
• Consider seeking expert advice from a tax advisor or financial planner

Conclusion

Whether you live in North Carolina, Texas, Florida or any other state where title loans are available, knowing the potential advantages and downsides of settling your car title loan is important so you can make an informed and educated decision that’s best for you. While many title lenders and loan servicers are open to negotiating loan settlements with eligible car title loan borrowers, a settlement is not always the best option.