How Does Debt Settlement Affect Your Credit?

Yes, settling a debt will affect your credit score. Before deciding to settle a debt, you should consider the pros and cons. Once you have a clear understanding of how settling a debt will affect your credit score, you can make a decision.

After weighing the options, most of our clients still decide to move forward with settling their debts, as compared to not settling them. Additionally, many clients who thought they wanted to settle debts decide instead to file bankruptcy, as the cost savings outweighs the credit concerns. We are here to provide guidance and help you make a decision which will remove the threat of creditors and provide you with financial peace of mind and prosperity as you move forward.

Debt Settlement Or Not Paying At All

From a credit perspective, settling a debt is more favorable than not paying on the debt. While the settled debt will appear as a zero balance on your credit report, a settled debt is still a negative on your credit report as compared to paying the debt in full. Alternatively, a settled debt is better for your credit report than a debt which has been ignored and not paid on time.

Prior to settling a debt, most clients have a record of late or missed payments associated with the debt. For settled debts, if you were late on payments prior to settling the debt, that credit history with the settled debt will remain on your credit report for seven years from the original delinquency date. This article from Experian “How To Determine An Original Delinquency Date” may help.

If you had no late or missed payments prior to settling the debt, the settled debt will remain on your credit report for seven years from the date of settlement.

The Cost Of Not Settling

While credit score concerns are valid, part of our job is to help clients clearly see the future ahead. We have been trained our entire lives to fret over our credit score, and for good reason. It’s difficult to buy a house without good credit. Interest rates on unsecured debt and vehicle loans are high when your credit score is low. Lastly, there is a part of us that believes our credit score will never ‘bounce back’ from negative credit reporting. This is simply not true. Your payment history is the most important factor in determining your credit score. If you make payments on time after settling your debts, you can routinely qualify for great credit options within two years of bankruptcy or debt settlement.

Creditors may pursue you for unpaid debts by phone and mail for quite some time. However, things can escalate quickly. An unsecured creditor can take legal action against you by filing a lawsuit for repayment of the debt. Their primary goal in doing so is to establish the validity of the debt and obtain a judgment. Debts which have gone to judgment entitle the creditor to more remedies under the law. These remedies include seizure of assets under a Writ of Execution, and forcing the judgment to be paid as part of the sale of real estate.

The Benefits Of Settling

If the debt you wish to settle is valid, other factors need to be considered in addition to how debt settlement affects your credit. Debts can typically be settled for pennies on the dollar, if your debt settlement attorney has a strategy for encouraging the creditor to compromise their balance in favor of a lump sum payment. Once settled, the debt no longer poses a constant threat of legal action against you, and your credit starts to recover. The lender stops reporting missed and late payments, and additional fees and penalties are no longer a part of everyday life.

One last concern is your debt to income ratio, which also affects your credit. By settling a debt, your debt to income ratio improves from a credit perspective. Your income hasn’t increased, but your debt has decreased. This makes you a much better credit risk for future lenders and creditors. This is true whether you’re trying to obtain a mortgage or a simple unsecured credit card.

Speak With A Charlotte Debt Settlement Lawyer Today

If you are considering settling a debt and asking yourself “How does debt settlement affect your credit,” you deserve to understand all your options. Sometimes, just one phone call is all it takes to discover you have more control over the situation than you thought.

If you would like to speak with a debt settlement attorney, call us at 704.749.7747 or click HERE to request a phone consultation. Consultations are free and answering questions is part of our job. We are here to help.