A settlement payment is when a creditor agrees to accept an amount less than the full balance you owe as payment in full. The amount you negotiate for depends on the situation and your negotiating skills.
Percentage
Settlements usually average in the range of 20 percent to 75 percent of the outstanding balance. Always get a settlement agreement in writing prior to sending the payment to the creditor.
Significance
Creditors will not negotiate a settlement until you are approximately 90 days past due on a debt. If you are current with your debts and you can afford to make regular payments, a settlement offer is probably not going to be beneficial.
Credit Score
If you have a credit score of 680, a settlement can lower your score between 45 to 65 points. A credit score of 780 will be lowered in the range of 105 to 125 points by a debt settlement.
Time Frame
Debt settlements remain on your credit file for seven years. This can affect your ability to receive credit in the future. If you are approved for credit, you will have to pay higher interest rates, and there could be some fees.
Fees
Debt settlement companies charge excessive fees to perform this service. If you can perform this service yourself, you save some money.
Geography
Twelve states, as of November 2009, don't allow for-profit debt management companies. The states are: Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia, and Wyoming.
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