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Debt Consolidation Versus Debt Settlement

Debt Settlement and Credit

Get your questions answered for debt settlement and credit from the debt relief experts.

Will Debt Settlement Hurt My Credit?

Debt settlement is the process of negotiating with your creditors and persuading them to accept less than what you owe on your account and forgive the balance. Getting balances lowered only works for unsecured debts.

The best you can do for a secured debt is to negotiate forbearance (a break from making payments for specified period of time) or a reduction in interest and/or late fees. Unsecured debts are debts on which no collateral is held. Secured debts are against collateral like a house or a car. Student loans aren't secured debts, but they can't be negotiated down or discharged in bankruptcy. Child support and alimony obligations also can't be negotiated down.

Why would a lender settle for as little as 40 to 50 cents on the dollar?

If a lender has too many "non-performing" accounts, it makes the lender look like it is making poor lending decisions and taking too much risk. This can harm the lender's standing with both the Federal Reserve Board and investors, so they'll generally settle in order to clear the books. Plus, it's more profitable for the creditor to take your settlement than to end up with nothing when you declare bankruptcy.

When is a good time to negotiate a debt settlement?

Typically, when you enter into a debt settlement program or otherwise are offered the option to settle the debt, the account must be 120 or more overdue. So, you're credit is already adversely affected. If the creditor or debt collector is reporting the debt on your credit report as a "charge off" / report code I9 or R9, then settling the debt is the smartest decision.

How is my credit affected?

Debt settlement itself negatively affects your credit because you're not paying the debt in full, as agreed. Creditors will typically report a debt settlement as "Settled" or "Paid in Full for Less than Full Balance". But, since your credit is already damaged, debt settlement will actually stop the continued negative effect because then the account is resolved. Not settling your debt will have a much larger negative impact on your credit than going ahead and taking care of the debt the best way you can through debt settlement.

Debt settlement programs will hurt your credit for a year or two. Then, your credit will start rebounding, as long as you keep current with the accounts you now have open. Bankruptcy and consumer credit counseling will hurt your credit for 3-10 years in most cases. So, it's easy to see where the damage caused by debt settlement is much less than what is caused by bankruptcy or entering into a consumer credit counseling service (CCCS) program.