While debt settlement can help you get out of debt quickly, you may have heard that it can also have a negative impact on your financial standing. But how bad does debt settlement hurt credit, and how does it compare to other options for getting out of debt?
Here’s a short introduction to “How bad does debt settlement hurt credit?” that answers this question and covers the pros and cons of debt settlement.
How bad does debt settlement hurt credit?
In debt settlement, also known as debt collection settlement, you’ll work with settlement companies to try to get creditors to settle your debt for an amount that is less than the total amount you owe. Some companies advertise enormous savings – pennies on the dollar – but debt settlements are typically between 25% and 80% of the original debt.
To make debt settlement work, you must stop making payments to your creditors. After a period of months, when your accounts are in significant arrears, the debt settlement company will contact your creditors and make an offer to settle the debt for some portion of what you owe. Creditors may be inclined to accept the offer if they believe it is the best deal they can get – they prefer to get some payment on your debt rather than nothing.
How bad does debt settlement hurt credit if your settlement offer is accepted?
If the settlement offer is accepted by a creditor, your debt will be erased. But your credit rating will be seriously damaged because you didn’t pay your bills for several months, and because you didn’t pay your debt in full.
How bad does debt settlement hurt credit if your settlement offer is rejected?
If your settlement offer is not accepted, your credit rating will still take a hit because of nonpayment on your accounts. It may take as long as seven years to rebuild your credit enough to apply for credit cards, loans, apartments, or mortgages.
How bad does debt settlement hurt credit if you have credit card debt?
The negative impact of debt settlement is the same whether you are trying to settle credit card debt or other types of personal loans.
How bad does debt settlement hurt credit compared to bankruptcy?
Bankruptcy typically impacts your credit even more than debt settlement – it can take a decade to repair your credit rating after bankruptcy.
How bad does debt settlement hurt credit compared to debt consolidation?
Debt consolidation usually does not significantly impact a credit score because it does not involve defaulting on debt.
How bad does debt settlement hurt credit vs debt management?
A debt management plan also does not significantly impact your credit score because you continue to make monthly payments as you work to retire your debt.
To learn more about the benefits of a debt management plan vs debt settlement and bankruptcy, contact American Consumer Credit Counseling for a free credit counseling session. Our certified credit counselors can help you understand all the options available to you for paying off your debt, and how each will impact your credit score.