Debt settlement programs are regularly advertised as a way of getting out of debt by paying just a fraction of the amount you owe. These programs typically enable you settle debt for 25% to 80% of your total debt – if they work at all. But how bad is debt settlement for your credit, and what is the impact of a debt settlement program when compared to other alternatives for debt relief? Here’s a short primer on “How bad is debt settlement for your credit?” that provides some answers.
How bad is debt settlement for your credit?
Debt settlement, or debt collection settlement, is a process by which you propose to settle your debts with creditors by offering a single payment that is less than the total amount of your debt. Creditors may be inclined to accept your offer if they are concerned they will otherwise get nothing from you. To induce creditors to settle, you’ll typically work with a debt settlement company who will instruct you to stop making monthly payments to your creditors for a period of time. As your overdue balances begin to add up, creditors may be more likely to accept a partial payment in return for erasing your debt.
How bad is debt settlement for your credit if your offer is successful?
If creditors accept your debt settlement plan, your debt will be erased but your credit score will be adversely impacted because you were unable to pay the debt in full and because you stopped making regular payments. You’ll probably also have to pay taxes on any amount that is forgiven, and you’ll owe the settlement agency as much as 25% of your savings.
How bad is debt settlement for your credit if your offer is turned down?
Since you won’t be paying your bills for several months, your credit score will be damaged even if your creditors reject your offer. That means you’ll be just as deeply in debt at the end of the debt settlement process, and you may have legal bills and extra fines on top of your original debt.
How bad is debt settlement for your credit if you’re settling credit card debt?
Negotiating credit card settlement is no different than settling other kinds of debt – your credit rating will be damaged, and it may take up to seven years to fully restore your credit.
How bad is debt settlement for your credit vs bankruptcy?
Bankruptcy is considered even more damaging to your credit rating than settlement, though bankruptcy is a faster process and may allow you to begin rebuilding your credit sooner.
How bad is debt settlement for your credit compared to debt consolidation?
Debt consolidation has no significant impact on your credit rating. It is merely a way of simplifying your financial life and reducing the interest that you’re paying on your debts, which may allow you to pay off debt faster.
How bad is debt settlement for your credit vs debt management?
Debt management also has no lasting impact on your credit rating. Under a debt management program, you’ll get support from a credit counseling company to manage your finances in a way that lets you pay down your debt more quickly – usually in 60 months or less. Your credit will not be impacted because you will continue making payments to your creditors during that time.
To learn more about the pros and cons of debt settlement and debt management, contact American Consumer Credit Counseling (ACCC) and schedule a free credit counseling session with a certified professional credit counselor.