When You Settle a Debt, What Happens to Your Credit Scores?

Published on Feb 11, 2015 11:31 am

A job loss, overspending, the death of a spouse – there could be many reasons why a person is unable to repay a debt. When someone can’t pay a bill, some people will simply stop paying their creditors and will default on the debt – an action that can have serious implications for their credit. Another option some consider is debt settlement.

What is debt settlement?

When you settle a debt, you negotiate with the lender to accept less than the amount you originally agreed to repay. How much or how little the creditor is willing to accept will vary based on its individual policies. Generally, however, once you’ve reached an agreement and paid the new amount, the lender will close the account and consider the debt paid.

In some ways, it’s better for both of you. Through debt settlement, the lender will get some money back and perhaps save themselves the expense and aggravation of taking legal action against you. You may be able to reduce the amount you owe to a level you can better manage, as well as avoid the serious credit ramifications of defaulting.

Still, settling your debt may not be enough to completely protect your credit scores from impact.

The possible negative effects of settlement

Defaults, collection actions and debt settlements all appear on your credit report. Although its negative impact may be less than a total default or bankruptcy, debt settlement can negatively affect a credit score, depending on the calculation model in use. Whenever you fail to fulfill the repayment agreement you’ve made with a creditor, it can reflect on your credit report and in your scores. Debt settlement may have a negative influence for a shorter length of time; collections generally stay on a credit report for seven years and bankruptcies for as long as 10 years. Once you’ve fully paid the settlement amount, your credit report will show that information.

The benefits of debt settlement

The primary benefit of debt settlement is that you no longer owe any money on that particular debt. Even if you end up paying only 20 percent of what you originally owed, if the creditor agrees to that amount, your entire debt is considered paid. Being free of burdensome debt can give you an opportunity to regain control of your finances, and improve your payment history if you’ve fallen behind on other bills.

When you have more debt than you can manage, you may find yourself facing multiple less-than-thrilling options for getting out of debt. Debt settlement can be one way to find debt relief, minimize the negative impact to your credit, and establish a foundation for future financial success.

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This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company.   © 2014 ConsumerInfo.com, Inc.  All rights reserved.

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