Debt settlement counselors contact creditors and negotiate payoff amounts, which are generally a fraction of what is owed. This provides debtors some relief while repaying debt. These programs will impact a credit score -- how much depends on the score strength.
Scores 700 or Higher
Debt settlement could have a significant negative impact on higher credit scores. According to Debt Steps, possible alternatives to debt settlement are a home equity loan or mortgage refinancing.
Scores Between 600 and 700
Debt settlement programs will have a noticeably negative impact on a credit score; however, the benefits from paying off the debt trump the hit on the credit score. According to Debt Steps, to be most effective, debtors should include only the most severely past due or most damaging items on their credit reports in the program. A lower percentage of creditors in the program will decrease the negative impact.
Scores 600 or Lower
If a debt settlement program can be successfully completed, the impact on the credit score is minimal. However, if the credit score is low due to late mortgage payments, medical bills or revolving credit debt, filing for bankruptcy could offer a quicker solution. According to the United States Bankruptcy Court's website, a Chapter 7 bankruptcy can be discharged in 4 months; a debt settlement program would not conclude until all included debt is repaid.
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