Can Debt Settlement Affect Your Credit Rating?

Debt settlement is a debt repayment procedure, in which the debtor negotiates with the creditor in order to reduce the owed sum of money. This lowered amount will be the ultimate settlement amount. You can either settle your debts yourself, or can take the help of a debt settlement company, who have expert counselors and attorneys to deal with these issues. However the rate of reducing the principal amount varries from one company to the other and also on the individual circumstances of the debtor. No matter how long the process is, it is a convenient way to get rid of your debt burden.

Usually, the debt settlement companies collect the amount that you can afford to pay monthly to repay your debts, adding the enrollment fee within it. They hold back the payment to the creditor for three to six months unless they agree to the settlement amount. When both the creditor and the settlement company reach a mutually agreed term, the creditor receives the settled amount and the process is repeated with all other creditors.

Creditors generally agree to the terms of the settlement company while negotiating. This is because, unlike the debt settlement process, the creditors have little or no chance to recover their money, if the debtor files for bankruptcy. Therefore they accede with the terms of the settlement company, which could at least return some of their money. However, the debt settlement companies make a detail analysis of the true financial situation of the debtor before starting the procedure.

How does debt settlement affect your credit rating?

Debt Settlement can affect your credit score negatively if in case you try to settle it only to save your money and also if you end up settling too many credit card debts. The negative impact on your credit report would stay for sometime, but it would be negligible and diminishing. Again, if you have missed your payments to your creditors due to which your account was charged-off, settling debt and making a regular payments would revamp the credit score removing the negative aspects from it.

Therefore, debt settlement, despite bear a negligible negative effects on your credit report, helps to restore your credit rating, enabling you to save a good amount of money while restricting the outflow. If you can ask and convince your creditors to mark the account as “paid”, then the negligible effect of the credit report will not last longer, whereas not repaying the debts will have a greater and long term effect on it.