What Happens After You Settle a Debt?

Although it takes a lot of work to reach a debt settlement agreement with your creditors, the work isn't over even after you've made the payment. You must keep an eye on your credit report and work on rebuilding your credit to ensure a solid foundation for your financial future.

Payment

Once you have made an agreement with your creditors to settle for a one-time lump sum payment, you will make the payment and the creditor will report your account as "settled." Typically, settlement payments range between 20 and 75 percent of the original balance, according to Smart Money writer Aleksandra Todorova. It's vital to make sure you have the lump sum payment on hand to make the settlement transaction a smooth one.

Credit Report

Check your credit report after the creditor has settled your account to make sure that it's been listed as settled. It's important the account is no longer listed as delinquent on your credit report, which will further drag down your credit score. If you find a discrepancy on your credit report, send a letter and any supporting documentation to both the creditor and reporting credit bureau. Credit bureaus must investigate all potential errors unless deemed frivolous, and they usually do so within 30 days.

Rebuilding

Debt settlement is extremely damaging to your credit because it requires you to default on payments. To give you perspective on the damage you may accrue, one payment more than 30 days late can negatively impact your score by as much as 110 points, according to MSN Money writer Liz Pulliam Weston. Generally, creditors aren't willing to allow clients to settle unless they seem headed for bankruptcy, which means defaulting on payments for up to six months or longer. Therefore, it's important to begin the rebuilding immediately by setting up your remaining accounts with automatic payments, lowering your credit card balances to 25 percent of their limits or less and putting yourself on a budget so that you don't fall back into a cycle of dependence on your cards. Timeliness of payments and debt utilization combined make up 65 percent of your credit score, so tackling those two elements will do the most to help your credit score over time.

Considerations

Debt settlement doesn't just damage your credit score; it may also make it difficult to obtain loans and new credit in the future. The appearance of debt settlement on your credit report may act as a warning sign to lenders that you have been delinquent and irresponsible with your finances in the past. Before pursuing debt settlement, consider meeting with a reputable credit counselor, who can provide you with information on a range of different options that are likely to be less damaging, including debt consolidation, debt management plans and even bankruptcy.