How Will a Debt Settlement Affect My Credit Score?

The answer to this question is pretty much the same as how a late payment is going to affect your credit score. It is impossible to predict accurately as to the impact a settled account is can do have on your credit score.

A debt settlement will typically have a negative impact on the credit rating of person. But the thing to consider is that a debt settlement happens on an account that is already delinquent. If the account has already been reported as delinquent, the negative impact on the credit rating has already occurred. One option that the consumer has during the debt settlement is to try and convince the creditor that he should report the account as paid and closed in exchange for setting the debt. Not many creditors might agree to do this but some may. If you can change the status of your account on the credit report from the link went to paid off, it might actually benefit your credit rating.

Settling debts can have a long-term beneficial effect on your credit score because it allows you to get rid of the debts of the past and move on to building a fresh credit history for yourself. The only negative impact is that future creditors might see that settlements on your credit report and realize that you did not fulfill your end of the bargain of paying back past lenders in full.

An account that has been settled will remain on the credit report for a period of seven years since it was first reported as delinquent. This will have a negative impact on the credit score but the impact will lessen as the information gets older.

You can see the impact on your credit score when you buy your credit score from FICO.com.  You are presented with a list of factors that are affecting your credit score negatively. So if you have settled the did in the past and want to see if it is having any sort of a negative impact on your credit score, you should buy your credit score from FICO.com and see the results more clearly.

Beware of Scams Run By Debt Management Companies Posing As Non Profit Organisations

It has now commonly come to be established that many debt management and debt settlement companies claim to have the status of a non-profit organization. While they may have the status it does not mean that they are not going to charge you for the services they provide. In fact many debt settlement services take the money from your first one to 3 payments that you send to them as their own personal fee.

This could result in a delay of the payments. If you were expecting the debt management company to start sending the payment from the first month, you will stop paying the creditors yourself. When the debt management company keeps the first few payments instead of sending them to the creditors your accounts become late and are reported to the credit bureaus.

If a debt settlement company asks you to pay some money upfront before they have provided you with any services they should seize you think about taking your business elsewhere. A credit counseling services not allowed to charge you any money before the actual realization of the services that they promise you. There are also required to present you with a written contract that mentions all details about what’s the services or that are going to be provided and what charges are going to be levied to provide them.

Even after the contract has been signed you have a period of three days to negate and cancel the contract.

What to do if the debt management company advises you to stop making payment to the creditor

Several debt settlement and debt management companies will tell you to stop paying your creditors. The reason behind is that most of the creditors will only be willing to negotiate on a lower payment when the account has been late for a long time. When a creditor is ready to charge off an account it means that he has lost expectation to recover money on that credit account. He may be willing to sell the account of to a collection agency at that point. Usually it takes at least six months for a creditor to charge off a credit account.

Having an account that has deliberately been made late from 30 to 180 days can result in a lot of negative information on your credit report. Having accounts reported as late as delinquent results in a record on your edit reports that stays there for seven years.

This can do some serious damage to your credit rating. You should only stop in your creditor directly once you’re assured of the fact that the payments are being made by a debt management company directly. There should be no the time between when you stop making payments and the debt management company takes over.

A Warning When Choosing a Debt Management Company

When you are choosing a credit counseling company or more particularly a debt management solution for your debt it should be a decision that you take after careful consideration. Before choosing to work with a debt management company and placing your finances in the hands of such an organization you should carefully check the background.

The way to choose how to work with a debt management company is preferably to get references. You should try to avoid the in your face advertisements on the radio and television or marketing offers through phone calls and emails. I think there is some sort of law also now that prevents blatant advertisement of debt management services, though I am not sure about this. Anyway, the idea behind this thought is that the debt management comapnies that are advetising this aggresively are commercial enterprises with own profit figures in mind. Sometimes you might need a facncy concern or top shot lawyer to take care of a debt that is huge and of course if is a business debt, then you need an attorney taking care of matters for you.

But for most personal needs for debt management, word of mouth serves the purpose. Asking family and friends is of help. But then again there is privacy to be considered. Many people will not be comfortable asking family and friends and revealing details of their financial situation.

In that case, you can find a non profit credit counseling organization approved by the US Department of Justice.

You should check the record of the debt management company with the website of the better business bureau, your local chambers of commerce and the office of your local attorney general. You can also contact the local consumer protection agency to see if any complaints have been filed against a debt management company. While you should to see complaints against any organizations, sometimes what speaks more of the legitimacy of the organization is the number of complaints that have been resolved.

What Are Other Options To Doing A Debt Settlement

An obvious alternative to debt settlement is credit counseling or a debt management plan. Is if you are not will late with your credit account payments or are anticipating problems in the future with continuing to make a payment then you can take the help of a legitimate credit counseling service. A credit counseling service can provide you with valuable credit education about financial management and also help you build a financial plan and will devise monthly budget that will help you increase your disposable income by saving money. Saving money on your current income will help utilize it for a better repayment of your existing debt.

If it is determined that you cannot pay off all of your debt with your existing income from matter how you crunched the numbers the credit counseling service can also and roll you in a debt management plan. A debt management plan will enable you to negotiate with your creditors through the credit counseling service a better terms of repayment. A debt management plan is usually geared towards bringing down your monthly payments by reducing the interest charges, extending the payments date and waiver of financial charges. The credit counseling company can manage to do this as first of all being a professional service they have existing working relationships with several creditors. Also debtors preferably with a professional service rather than with individuals.

While you’re enrolled in a debt management plan status of your account reported the credit rose may reflect this. If your accounts had never been late before and able continue to be current which is what makes debt management times different from debt settlement. Even if they were late by a couple of payments and haven’t yet been reported as delinquent they may be brought current by making payments through a debt management plan.

Credit counseling and debt management plan is a good alternative to debt settlement since it allows you to it cuts down on the amount of your debt by negotiating with your creditors and also does not do a lot of how your credit rating since most of the credit scoring models today will do not attach lot of negative value to using credit counseling all enrolling for a DMP.

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.

The Difference between Credit Counselling and Debt Settlement

The main difference between credit counselling and debt settlement is that while debt settlement involves settling a debt with a creditor by making a one-time settlement payments that is lower than what you agreed upon, a credit counselling service will negotiate lower and more favourable terms of the payment with your creditors and allow you to keep paying your debts on a monthly basis.
Another major differences that a debt settlement will report your accounts to the credit bureau as settled.  When an account has settles status in a credit report it is almost never viewed favourably by future lenders and has a negative impact on your credit score as well.
Being a participant in credit counselling is NOT necessarily considered as a negative thing by many creditors and the credit scoring model.  Several major financial institutions and banks consider being a part of a credit counselling plan as a positive sign of the consumer trying to get a control on his debt.  Many credit scoring model is including the FICO score claim that being a part of credit counselling has absolutely no bearing on the credit score a calculation.

A credit counselling agency provides credit education to the consumer along with providing other services such as helping you with your debt repayment.
Several credit counselling services help you with your debt repayment by enrolling you into debt management plans which generally involves negotiating a lower rate of interest with the creditors along with waverer of late fees and financial charges.  A debt management plan entered into by a credit counselling service does not settle the debt but allows you to keep making payments to the creditors after they have been brought down through negotiation.  Under a debt management plan credit counselling service will require the consumer to make a single lump sum payment to them every month which is less than the sum of original instalments amount that was due before the negotiation.  It will then disburse this amounts to your various lenders.  A credit counselling service endeavours to get you out of debt within two to five years using a debt management plan.  Apart from providing debt management services are credit counselling service also provides budgeting and financial planning which may not only be essential to the consumer but maybe all that the help that he requires.  Many credit counselling services work on non-profit basis where they provide you the basic services for free or for a very low fee.  They may also require you to participate in credit counselling and education programmes before or after as a requirement for entering into a debt management plan.  The goal of a legitimate credit counselling company is not only to address your current problems but to ensure that you remain debt free and financially secure in the future by arming you with strong credit education.

A debt settlement company will try and sell clear debt with your creditors by making a one lump sum payment that is less than what you actually owe them.  They might otherwise you to stop making the payments to the creditors for a period as long as 180 days in order be in a more leveraging position to negotiate the repayment.  The theory is that once an account goes delinquent and the consumer refuses to pay the lender will be more desperate to get whatever money they can recover.  The result is that all your accounts are either reported late or delinquent to the credit bureau.  This has a serious negative impact on your credit score and may haunt you for a long time in the future when the negative information prevents you from qualifying for credit.  Most of the lenders view a settled account as very negative as it shows that you did not pay the lender has agreed.  A settled account brings your credit worthiness under a lot of scrutiny and makes you a potential high risk for future loans.

How Debt Settlement Works

It may get confusing to sift through terms like debt management, debt consolidation and debt settlement.  They may all sound alike.  But they are not.  There are subtle differences between how these different processes work that may make all the difference in the end to your debt problems.  In this article you will speak of debt settlement how it works and the dangers of using debt settlement.

Debt settlement be sound a lot like a debt management plan but it’s usually not.  And ideal debt management plan strives to lower your interest rate and give you better terms of repayment by renegotiating with your creditors.  If you’re payments to the creditors are current then they usually stay current and you continue to pay your creditors through the debt management company every month according to the renegotiated terms of the loans.
However, a debt settlement company will usually deliberately stop payments to your creditors in order to reach negotiate better terms of interest.
If you have seen advertisements for debt settlement they usually read something like this:
” Reduce your debt by up to 60%.  Get out of debt less than six months.”
while it is true that a debt settlement company might be able to cut down on the amount that you go to your creditors, it may or may not explain the exact way it is going to achieve this.  Here is how debt settlement usually works.

How a Debt Settlement Company Works

During the initial contact with a debt settlement company you will be asked to provide the names of the creditors along with the amount of money that you go.  After a preemptory calculation the debt management company will give you a figure which will be the new lower monthly payment you will be required to pay them.  You will then be advised to stop paying your creditors and send the payment to them instead to settle the debts and make the payments on your behalf.

If you have not carefully gone over every inch of the process that the debt settlement company is going to undergo to settle debts then it is likely that is the first one to four payments that you make of them are going to go in their coffers as a fee for providing the service for you. After that the remaining payments are put away in an account to accrue. Depending upon the number of creditors you or the money to, the amount of the monthly payment you make, the debt settlement company will wait for a period of time which may be anything from 60 – 180 days before they contact your creditors in order to negotiate a settlement.

Do you realize what has just happened here?  A debt settlement company has deliberately stopped paying your creditors in order to make your accounts late and delinquent.  Many creditors will only negotiate a settlement once the account is late. Debt settlement company usually works on the principle that they have better leverage with creditors once the consumer payments have been delayed for a considerable amount of time.  Plus delaying the payments for a few months enables them to put together a larger sum from your monthly payments in order to make one time settlements.  While it is possible that a debt settlement company may be able to settle your debts, there is something else that has happened which may be damaging to your financial prospects in the future.
When a payment is delayed to a creditor of more than 30 days to creditors usually reports this to the credit bureau.  If all of your payments have been delayed by the debt settlement company than all your creditors have properly reported your account as late for delinquent to the credit bureau.  If your accounts were not already late this will cause a serious negative impact on your credit score damaging it for the years to come.  You may find it difficult if not impossible to get further credit in the future till the time that this negative information is present on your credit report.  Even then you may find that you need to build up a credit histories right from the scratch which may prove to be tedious and difficult.  Credit history is not just about a good credit score but also about the depth meaning as to how far back your credit history goes.  Ruining your credit history that might have taken years to build may be more of a price then you’re willing to pay.

During the time that the debt settlement company has stopped paying your creditors you might begin receiving collection calls as well which might prove to be a further harassment.

If the debt settlement company manages to settle the account with your creditors and delinquent information does not get removed from a credit report.  It will merely get updated as “charged off settled” or “paid settled”, which tells the future creditors that you did not pay the amount borrowed in full.  It may take you months or even a few years to get approval for further unsecured credit such as a credit card after you have been through a debt settlement.

You could owe taxes on settle debts as well.  The Internal Revenue Service treats foreign debts as income and expects you to pay income taxes on it.  Creditors are supposed to send you a form 1099 C. for reporting cancelled debts but even if they don’t you are still expected to include this form with the tax returns.

Alternatives to Debt Settlement

As mentioned before various processes like debt management, debt consolidation and debt settlement may sound alike but in fact quite different.  If you are current on all your accounts or just a couple of months behind debt settlement may not be the right solution of you.  If you have started having problems paying off your credit accounts recently or anticipates the problem to rise in the future than consumer credit counseling may provide with the help you need in managing your debts without damaging your credit rating.  Entering a debt management plan that a credit counseling service may allow you to reduce the monthly payments to your creditors while keeping the status of your accounts current.
Consumer credit counseling is now viewed with a liberal perspective by many lenders and credit scoring models.  Participating in a credit counseling does not have too necessarily hurt your credit rating as long as your payments continue to be made on time.

In theory anything that a credit counseling service can do for you you can do yourself.  If you are having problems or are late with one or two creditors only then you may attempt will negotiate with them yourself.  You creditors may already have a hardship programme for customers who are facing financial difficulty.  You may be eligible for temporary reduction for a period of six months to a year in your monthly payment and interest-rate.

7 Points To Check When Choosing a Debt Management Company

It is commonly recommended that you try and work with your existing bank when looking for a debt management solution.  However there are many companies that call themselves that management companies that offer solutions to consumer debt problems.  Choosing a debt management company can be a tricky affair and should be done extremely carefully.  The management of debt is a crucial exercise that will go a long way in determining the future of financial freedom and security.  Before you place yourself in the hands of a debt management company issued to all that you can to make sure that your finances are in the right place.  The following are a few points that you should check on in order to decide which debt management company to work with.

Check with the Better Business Bureau for Complaints

While you can expect to see some complaints for almost all businesses that you check up on with the better business bureau, all or at least the majority of them should have been resolved by the company to the satisfaction of the consumer.  Checking out a debt management company or any other business with the better business bureau is an easy process.  Simply was it their website www.BBB.org.

Advice to Stop Paying Your Creditors

Sometimes a debt management company will ask you to deliberately stop paying your lenders. They might tell you that you will be in a better position to negotiate lower rate of interest once you have stopped paying them.  In some cases the payments are deliberately withheld for  60 to 120 days.  Usually a creditor reports non-payment to the credit bureaus once the payment gets delayed for more than 30 days.  If this information finds way on your credit report it will damage your credit score for a long time.  Negative information such as non-payment or a delinquent account will stay on your credit report for a period of seven years from the original date of delinquency.  You must make it absolutely clear with the debt management company as to when they will start the repayment process with your creditors.  Till then, if your payments have been current, keep them current and only stopped paying them when the debt management company takes over.
Some debt management companies tend to pocket the first couple of payments that you make towards the payment of your creditors.  Make sure that this is not the case with the debt management company you are dealing with.

A Pseudo-Nonprofit Status of a Debt Management Company

There are several credit counseling agencies and debt management companies that will assist you for free or for a very low cost.  Many debt management companies will convince you of the non-profit status in to justify their high fees as being legitimate.  The truth is that certain states require credit counseling services to be non-profit agencies in order to function.  While this is that this may be true on paper a debt management company may try to cause you into making a forced donation as they are not allowed to charge a fee directly.  You should be aware of the fact that in the recent times the Internal Revenue Service has revoked the nonprofit status several credit counseling services.  If a debt management company claims to be a non-profit organization don’t just take their word for it.  Ask to see their certification.  The fact remains that you can get debt management solutions at a very reasonable cost no cost it all as many of them receive their payment from the creditor as what is known as ‘fair share’.

No Details about the Account of Payment

Whenever you use a debt management company to make the payments your creditors the company should provide you with a statement every month in order to disclose how they have dispersed the money amongst your various creditors.  You should have a clear indication as to how your money is being utilized to pay off your debts.

Absence of a Written Contract or Agreement

It is a common exercise to get in touch with the credit counseling company or the debt management company over the phone or the Internet.  Do not commit yourself to a debt management programme without first having the terms and conditions of the contract in written. The contract should contain all information about the fee that they will be charging and the manner in which the payment you make every month will be utilized to pay off your creditors.  Don’t hesitate to disagree or argue over any terms of conditions that are not conducive to your circumstances.  If you feel that the terms of the contract are not reasonable, look elsewhere.

False and Exaggerated Claims

It is a common claim by debt management companies to remove negative data from your credit report.  Nobody has the power or the authority to remove negative information from a credit report that is accurate.  Only the inaccurate information can be removed by a process that is called disputing the error with the credit bureau.  This is something that you can to yourself quite simply by ordering a credit report and then filing a dispute online which is the easiest, or by phone or e-mail.  What a debt management company can do to you is attempt to negotiate with your creditors for a change in the terms and conditions of the loan such as lowering of the interest-rate, waiver of the late payment fee and other financial charges.

Steps To Follow To Settle Your Debts

It is always advised that the best way to repair your damaged credit is by trying and settling all your debts. Whenever you trying to settle the debt after the timeline for the payment is over you should expect to be paid two thirds to the full amount. Depending upon the balance that you were the creditor he may be willing to make certain concessions on the principal amount and the interest rate. This becomes even truer in the case when your debt has been written off as a bad debt by the lender. This means that he has considered that amount of debt as a part of his loss and is not expecting to get any part of that money back. The following the basic steps that you should undertake when trying to settle an overdue debt with a creditor.

  • Try to reach a initial and tentative agreement over phone or e-mail.
  • Make a written copy of the agreement and send it to the creditor requesting him to sign it and return it to you.
  • Get the creditor to agree to remove the negative transaction for non-payment from your credit report. He can do this by updating the information that he provided about your credit to the National credit bureaus.
  • Send the creditor demand draft or a money order with a receipt that says “Full Payment”.
  • Check Your Credit Report to See If the Negative Entry Has Been Removed and If It Hasn’t, Write a Letter to the Creditor Asking Him to Comply with the Agreement That You Both Had. Also Inform the Credit Bureau That the Debt That Still Reflects in Your Credit Report Has Been Settled and Should Be Stricken off.

 

You should however Bear in mind that an account that becomes delinquent continues to show new credit report for a period of seven years even after it has been made current and paid off. Even though you creditor may be able to take the information with the credit bureau as the account having been settled, the information about its early delinquency or default will continue to show. The only way to avoid this is to contact the creditor before the account becomes delinquent or before the lapse of 30 days after the due date for your payment because this is usually when the default is reported by the creditor to the credit bureau.