What Is Debt Settlement

How Does Debt Settlement Work and Why Is It Bad for You.

In a couple of her previous posts we have talked about debt management plans. Sometimes people confuse debt management plans with debt settlement. The two are in fact quite different. Here is how debt settlement works.

You may come across advertisements for debt settlement that will reduce your total amount of debt by more than half. This could be true but most of the times isn’t. Plus even if it is it’s not all good news. Debt settlement can harm your financial situation in the long run even if it does manage to reduce the balance on one or more of your debts.

When you get in touch with the debt settlement company they will ask you to start in your creditor. They will ask you to start sending the money to them instead. Will provide you with an estimate of how much they can reduce your debt once you provide the name of your creditor and the details of your debt. For the first few months that you send the payment to the debt settlement company none of it will go towards paying your creditor. In fact the first one to 3 payments that you make to the debt settlement company might go into their own account as fee for providing the service to you. After that they wait for a few months delay your account the creditor has become late. Over this time they have be taking your payments and building up a lump sum fund. They will then call up the creditor and offered to negotiate and settle the account owed the amount of lump sum payment that has been accumulated through your monthly payments. If the creditor agrees to settle when he is paid and you can consider your debt paid off.

What is bad about debt settlement?

What is bad about debt settlement is the fact that you are asked to deliberately stop in your creditor. No creditor will be ready to settle a debt unless the account has become late. In most of the situations the creditor will try to recover his money only after the account has reported as delinquent which takes as much as six months of non-payment.

Having your account being reported as late on delinquent to the credit you will have a very senior and negative impact on your credit score. This means that even though you manage to pay off the debt at a lower cost your credit rating will be damaged which will prevent you from qualifying for credit in the future. And even if you do qualify for credit you will be charged a higher rate of interest. Lenders will view your credit report and see that you settle your previous that accounts. Debt settlement is very negative information to be present on a credit report and lenders will be tempted to decide against your credit application. Even if you have successfully managed to settle your debt the information about your credit account it became late with stay on your credit report for seven years. After the settlement your account will be updated as Charged off Settled or Paid Settled which is not as good as a Paid in Full account.

It may take you a very long time to get your credit report back in shape so as to qualify for credit such as credit cards, personal loans and other forms of on secured credit.