Although no one plans to go into serious debt, millions of Americans find themselves in this position each year. If you’re among the many who are faced with the decision about whether to work with a debt settlement lawyer, you probably have many questions and concerns. One primary fear when considering debt settlement is that it will negatively impact their credit score. While it’s true that this process can lower your FICO score in the short term, it could still be wise to work with a debt settlement lawyer, pay off your reduced balance, and start fresh. Here’s a more in-depth look at how debt settlement can affect credit scores and what you can do about it.
How Does Debt Settlements Work?
Debt settlement is a process where you or a company on your behalf negotiates with your creditors to pay off your debt for less than what you owe. It’s an option that might come into play if you’re dealing with overwhelming debts and looking for a way to reduce your financial burden.
This approach usually involves setting aside funds into a dedicated account, which then gets used to make a settlement offer to creditors. It’s important to recognize the impact this strategy can have on your credit score. When you settle a debt, it means you’re paying less than agreed upon initially, which creditors might report as settled for less than the full amount. This can reflect negatively on your credit report.
The Short-Term Impact of Debt Settlement on Credit Scores
When you settle your debt with a lawyer, your attorney will negotiate with creditors to lower the amount you need to pay back. This makes it possible for you to move forward with your life without filing for bankruptcy, paying exorbitant interest fees each month, or continuing to be harassed by creditors and collections agencies. Debt settlement does not, however, remove delinquent or collection accounts from your credit report. If you were late on any payments, this will be reflected in your report for seven years. Settlements will also show up on your report for seven years. Your credit score will initially drop during debt settlement, but you can build it back up over time.
Debt Settlement May Still be Right for You
Despite the fact that your FICO score will take a hit when you settle your debt, for many Americans, it’s still the best course of action. This is because paying off some of your debt is better than paying none at all. It shows that you’re willing to take responsibility, and it will protect you from the implications of publicly filing for bankruptcy. Those who opt for debt settlement may find it easier to secure a loan than those who have filed for bankruptcy or are drowning in interest payments but never paying down their debt.
What Type of Debt Should I Settle?
Not all debts are suitable for settlement. Typically, unsecured debts, such as credit card debt, personal loans, deficiency balances, and medical bills, can be settled. These types of debts don’t involve collateral that a creditor can claim if you fail to pay.
Secured debts like mortgages or car loans are not ideal for settlement because the lender has the right to foreclose on your home or repossess your vehicle to recover their money. Before deciding to settle, it’s wise to evaluate the types of debt you have and consider which ones are causing the most financial strain.
How Many Points Will My Score Drop?
The impact of debt settlement credit score varies from one individual to another, largely depending on the original status of your credit accounts and how the creditors report the settlement.
How long does debt settlement affect your credit? A settled account can remain on your credit report for up to seven years from the date of first delinquency, influencing your ability to secure loans or get favorable interest rates. The exact number of points your score will drop isn’t predictable since everyone’s credit history is unique, but it’s clear that settling debts could pose a setback to your credit score in the short term.
Choosing a Company for Your Debt Settlement
When considering debt settlement, selecting the right company to represent you is huge. Look for firms with a good track record of negotiating favorable settlements for their clients. It’s also important to review their fee structure.
Transparency is key. The company should be open about the potential impacts of debt settlement on your credit score and provide you with all the necessary information to make an informed decision. Gathering reviews and testimonials from past clients can also offer insight into the company’s effectiveness and reliability.
Should I Avoid Debt Settlement?
Deciding whether to pursue debt settlement is a personal decision that depends on your financial situation. While it can offer a way out of overwhelming debt, the consequences it has on your credit score cannot be overlooked. It’s a strategy that might make sense if you’re struggling to make minimum payments and facing the prospect of defaulting on your debts.
How Do I Improve My Credit Score?
After settling your debts, focusing on rebuilding your credit score should be your next step. Consistently making timely payments on any remaining or new debts is big. This demonstrates to creditors that you’re responsible for your financial obligations, which can positively affect your credit score over time.
Another strategy is to keep your credit utilization low. This means not maxing out your credit cards and keeping your balances well below your credit limits. Additionally, you can check your credit report for errors and dispute any inaccuracies you find, as these can unjustly lower your score.
Building a positive credit history takes time, patience, and consistent financial behavior. While the road to recovery might seem long, adopting responsible financial habits can gradually improve your credit score, making it easier to qualify for credit at more favorable terms in the future.
Don’t Get Caught in the Interest Trap
To avoid debt settlement, some people try to make the minimum payments on their accounts each month. Unfortunately, this can lead to even more financial strain and hardship. A shocking majority of each minimum payment goes directly toward interest, and interest rates can be outrageous. Taking this route, you could spend decades paying down your debt while losing tens of thousands of dollars. Your total outstanding debt will remain high throughout these decades, causing your credit score to suffer for much longer than if you worked with a debt lawyer to pay it all off now. By settling, you get to be debt-free and can begin rebuilding your credit by making positive financial choices moving forward.
Getting Help with Debt Settlement
Debt settlement can change your life for the better, but it’s a complicated legal process. Without adequate help, you could end up paying more than is necessary, or you could continue to be harassed by creditors. Connect with one of our expert attorneys to start taking steps to eliminate your debt today. We’ll walk you through the process so that everything is done efficiently and legally.