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What is debt settlement?

Debt settlement is a way to quickly and relatively easily reduce or eliminate your debt, fast. Usually, if you’re in a situation where debt settlement might be for you, you’re facing serious difficulty or even bankruptcy. In general,debt settlement is negotiated by a third party agency on behalf of you as the debtor, or you can do it yourself. Either way, the end result is that the creditor agrees to settle the debt for less than the amount that is actually owed.

During the settlement process, you as the debtor receive a letter from the creditor stating that the debt has been fulfilled. At this point, the creditor reports that the debt has been paid, settled, or settled for less than full balance. Creditors usually agree to settlements because they know that if you file bankruptcy, they will get nothing of what you owe. Therefore, something is better than nothing to them.

Your Credit Score

Although you might be worried about debt settlement’s effect on your credit score, it’s really a moot point. This is because if you are suffering financial difficulty, your credit score is also probably negatively impacted. Your debt to income ratio is high, so that your debt to credit ratio is also probably high. It’s likely that you have already missed some payments, or have been late on several. These are all things that can bring your score down significantly.

What should you do first? Check your credit score and see what it is. Is it better than you thought? If you’ve missed payments or are carrying high balances with credit cards at or beyond their limit, in fact, your credit score is probably mediocre at best. If you work with the debt settlement company to get good settlements with your creditors, this will only help your credit score in the end.

To be truthful, debt settlement will probably not negatively impact your credit rating to any great extent. In the short term, it might go down by up to 50 points, but in the long run, you score will increase mainly based on the fact that you don’t have so much outstanding credit card debt anymore.

In a nutshell, if you already have delinquencies, these will negatively impact your FICO score. If you take care of those delinquencies, your balance is $0, and your credit score recovers. In fact, most creditors will not work with you to lower payments until your account is at or near the “charge-off” status. The creditor does not want this to happen. If your account has been delinquent for more than 180 days, the credit card company that knows that you are in trouble.

Only a Temporary Drop in Your Credit Score

In fact, if you participate in debt settlement, your credit score will only be affected temporarily. And if you’re honest, you know that this certainly is better than trying to pay off the debt yourself with just minimum payments, which could easily reach into 20 years or more, with a low credit rating the entire time.

However, if you participate in debt settlement program, you’ll settle your entire debt and your credit report will say that these accounts have been “settled.” This will be more beneficial over the long term compared to what would happen if you don’t take action to settle you accounts. In addition, your worries and stress will be greatly reduced if you participate in debt settlement and get this taken care of.

Find yourself a debt settlement company that’s reputable and interview them before you decide. Make your choice carefully, and your relief will be many fold; not just financial, but emotional as well.

For more information on how debt settlement affects your credit score, visit http://www.debt-free-destiny.com.

By Brad Marolf