What is a debt settlement process?
A debt settlement process is advertised as a way of getting out of debt quickly and relatively painlessly. Many debt settlement services boast that they can get creditors to wipeout your debt by paying only pennies on each dollar you owe. But as with anything that sounds too good to be true, there are a lot of potential drawbacks to the debt settlement process.
How does debt settlement work? The debt settlement process looks something like this: you contract with a debt settlement service and instead of paying your creditors each month, you put that money into a savings account. After several months, when your accounts are seriously overdue, the debt settlement company will approach your creditors and offer to settle the debt for a portion of what you owe. If the creditor agrees, you’ll use the money you’ve saved to settle the debt, pay the settlement company a substantial fee, and pay taxes on the amount of debt that was forgiven.
However, if the creditor doesn’t agree to settle the debt, you may end up owing even more money, fending off calls from collection agencies, or being sued by your creditors for past due amounts.
Knowing this, the next question most consumers have is, “How does debt settlement affect my credit?”
The answer: pretty significantly. Whether your debt settlement process is successful or not, your credit rating will be damaged. How bad does debt settlement hurt credit? It may take as long as seven years to rebuild your credit rating enough to apply for credit cards or take out loans or mortgages.
Consult an ACCC professional about the debt settlement process.
When you want to know more about debt settlement credit score impact and about alternatives to the debt settlement process, the financial professionals at American Consumer Credit Counseling (ACCC) can help. As a not-for-profit organization, our mission is helping people like you find the best and fastest path out of debt, and to develop the skills to live debt-free in the future. We offer free credit counseling and low-cost financial services that can help you better understand the pros and cons of the debt settlement process and other strategies, and determine which options are best for your financial situation.
Debt management: an alternative to the debt settlement process.
Our professionally certified counselors frequently recommend a debt management plan over the debt settlement process. What are the advantages of a debt management plan vs debt settlement? In a debt management plan, you won’t stop paying your creditors, so your credit rating won’t be significantly damaged. Your financial life will be easier and less stressful, as we’ll work with you to set a budget you can afford while you pay down your debt. Each month you’ll make just a single payment to a fund at ACCC, and we’ll take responsibility for using that money to pay your creditors on time. That also lets us work with your creditors to try to reduce interest rates, waive fees, and lower payments, helping you to pay your debt off more quickly – usually in 60 months or less.