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How does debt settlement affect my credit?

Every consumer considering a debt settlement program has the same question on their mind: “How does debt settlement affect my credit?” After all, while debt settlement may be able to help you get out of debt more quickly, the debt settlement process may not help you get where you want to go financially if it has a negative impact on your credit rating.

Here’s a short introduction to “How does debt settlement affect my credit?” that answers this question and offers a brief look at the pros and cons of debt settlement.

How does debt settlement affect my credit?

Debt settlement inevitably has an adverse impact on your credit rating. That’s because, to encourage your creditors to accept a settlement that is less than what you actually owe, you have to stop paying your monthly bills. As your past due balances begin to grow, it’s thought that creditors are more likely to accept a settlement if they believe it’s the best they can do.

Successful debt settlements typically offer creditors 25% to 80% of the total amount owed, though your savings will be reduced by a large fee for the settlement company or US debt settlement service (typically 25%) and by taxes on any amount forgiven (often another 25% of the amount saved.)

How does debt settlement affect my credit if creditors except my offer?

If your settlement offer is accepted, your debt will be erased, but your failure to make good on your financial obligations will harm your credit rating for up to seven years.

How does debt settlement affect my credit if creditors reject my offer?

Your creditors don’t have to settle your debt – they may opt to sue you instead, adding legal bills to your existing financial debt. And your credit rating will still be severely damaged because you failed to make payments for a number of months as part of your debt settlement program.

How does debt settlement affect my credit if I’m settling credit card debt?

Credit card debt settlement works the same as settlement of other types of debt – your credit rating will be negatively impacted either way.

How does debt settlement affect my credit compared to bankruptcy?

Many consumers are interested in the benefits of bankruptcy versus debt settlement. Most financial professionals will encourage you to consider bankruptcy as a last resort, as the process may force you to give up certain assets and your credit rating may be damaged for up to 10 years.

How does debt settlement affect my credit over debt consolidation?

Debt consolidation involves taking out a new loan at a lower interest rate to pay off multiple older loans. Consequently, it has little to no effect on your credit rating.

How does debt settlement affect my credit versus a debt management plan?

A debt management plan lets you avoid the debt settlement bad credit impact. Under a debt management plan, you’ll get help to manage your finances more carefully, enabling you to continue making monthly payments. You’ll also work with a credit counseling agency to develop skills to avoid debt in the future, and you can approach your creditors to seek reductions in interest rates, fees, and finance charges that can help you pay off your debt more quickly.

To learn more about debt management, call for a free credit counseling session with a certified professional from American Consumer Credit Counseling, a nonprofit agency working to help consumers find their way out of debt and live life debt-free in the future.

See if our Debt Management Program is right for you Should you consolidate your debt? See how much it really costs to use your credit cards
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