Debt settlement and bad credit: what you need to know.
While a debt settlement plan may or may not help you get some debt relief, there’s one thing you are sure to get from debt settlement: bad credit.
Under a debt settlement arrangement, you’ll hire a debt settlement company to approach your creditors seeking to settle your debt for a one-time payment that represents some portion of the total amount you owe. To make your creditors more likely to accept this settlement, you’ll need to stop paying your bills for a number of months. The theory is that creditors will be more likely to accept your debt settlement offer because they would rather get some money from you than nothing at all.
Does debt settlement work? Sometimes it does. Of course, it’s rare that you can settle tens of thousands of dollars in debt for just a few hundred bucks, as is often stated in advertisements by debt settlement companies. But it’s also true that sometimes creditors will turn down your settlement offer and choose to take you to court or turn the matter over to a collections agency, adding fines, penalties, and legal bills to your total debt. And then there’s the biggest ramification of debt settlement – bad credit.
How does debt settlement create bad credit?
Regardless of whether your debt settlement offer is accepted or not, the fact that you have stopped paying your bills during the process of debt settlement means bad credit scores will follow. How does debt settlement affect your credit rating over time? For many consumers, it may take as many as seven years after debt settlement to repair bad credit. That creates difficulty getting loans or credit cards and making it difficult to rent an apartment or get a mortgage.
Before you enter a debt settlement arrangement, it’s important to understand all the pros and cons of debt settlement and how debt settlement may result in bad credit history. That’s where American Consumer Credit Counseling (ACCC) can help. As a nonprofit organization, we offer free credit counseling services that can help you better understand the relationship between debt settlement and bad credit and provide you with a range of other options to get out of debt without ruining your credit score.
Alternatives to debt settlement/bad credit.
For consumers weighing the choice between bankruptcy versus debt settlement and bad credit, we often recommend another option: debt management. Under a debt management plan, we’ll help you make a budget you can live with while continuing paying your creditors. Our counselors will help to make sure your bills are paid on time, and we’ll even seek reductions in interest rates and finance charges to help you pay your debt off faster. Most consumers who choose debt management can pay off their debt within 60 months, avoiding the difficulties of debt settlement and bad credit.