All of us are aware of debt settlement as a solution to debt or an alternative to bankruptcy. The ads for debt settlement read something like this –
“Get Out of Debt within 6 Months.”
“Reduce your Debt up to 60%”
Debt settlement is an option which reduces your liability to a certain extent, but does have a negative impact on your credit history and score. If you are financially trapped, and considering debt settlement as one of the options then understand the complete story first.
How does Debt Settlement Work:
What needs to be done by you?
If you feel that debt settlement is the only option left for you, then you need to get in touch with a debt settlement company and explain them your situation. Depending on the situation they draft a payment plan for the applicant who then pays the settlement company instead of his creditors. The settlement company will then handle all the payments on behalf of the applicant.
What does the settlement company do?
The debt settlement company creates a savings account on behalf of their customer and deposits all the payment in that account. Once the account grows to a certain amount, the settlement company gets in touch with your creditor and negotiates for a settlement amount. Once the settlement amount is agreed upon, the agency will make the payment to the creditor and will charge their customer either with flat fees or a percentage of the amount settled.
Is it right to opt for Debt Settlement?
On the face, debt settlement seems to be a very convincing option wherein you pay to the debt settlement company which pays your creditors on your behalf. In the end, all your creditors are paid, and you can rest at peace in life. Now understand the fact here that the moment your accounts are settled that’s when the whole concept comes haunting you. Consider the following –
- Creditors do not agree for settlement unless you have failed to make payments for a few months.
- Late payments certainly get reported to the bureaus, and this is bound to affect your credit score.
- These late payments remain on your report for a good amount of seven years.
- Dropped credit score, a negative mark on your credit report and failure to repay on time will hinder you from getting new loans, insurance, jobs, etc.
- Upon settlement also, your account is not cleared. Instead, it’s marked as “Paid Settled” or “Charged-Off Settled” and neither of this is considered as good as a “Paid Full” account.
Hence, before you opt for debt settlement do consider the above-mentioned points and then draw a conclusion.