Debt settlement is an option that can help you get out of debt quickly and save you a substantial amount of money. At the same time, it can also negatively impact your credit history and make it difficult to obtain financing in the future. Before taking this approach, it is important to look at the impact of this decision.
How Debt Settlement Works
Debt settlement is a process that can be initiated as an individual or with the help of a debt settlement service. With this process, you negotiate with your creditor to agree to take less money than your total account balance. You typically have to make a lump sum payment to the creditor and then they report your account as "settled" to the credit bureaus. You will no longer be able to use your account, and it will be closed.
Credit Score
When you go through a debt settlement with one of your creditors, it can significantly impact your credit score. Depending on how high your credit score was in the first place, it could be lowered by as much as 125 points. Your credit score is a cumulative representation of how you have handled credit, and every lender will look at this score when making a lending decision. It could take several years to get your credit score back up to a high level.
Debt Settlement Companies
When you consider debt settlement as an option, you may find that there are a number of companies that offer this service. While you could contract with one of these companies to do the negotiations for you, it could work against you. Many of these companies do not provide the services that they claim, and they could require a large upfront fee. If you decide to work with one of these companies, you need to make sure that you are dealing with a legitimate provider.
Other Credit Damage
Before a creditor will consider settling your debt, you will have to be very delinquent on your account. This means that you will have to skip several payments before debt settlement is even an option. Some creditors will wait six months before they consider this approach. In that amount of time, the six missed payments will severely hurt your credit score.
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