Debt Settlement and Your Credit
Most advisers approach the topic of debt settlement much like a doctor would break the news to a patient with months left to live. Unfortunately, it is true that debt settlement will take a sizeable chunk out of your credit score, and it is also true that future creditors don’t look too kindly upon a debt settlement in your past. However, for many debtors, going forward with debt settlement can mean avoiding bankruptcy, a considerably worse option, and getting on with their lives.
You can begin rebuilding your credit just two years after a debt settlement, and seven years after the settlement all evidence of it is completely gone. If you don’t have the means to get a low-interest loan, but you can take the time to educate yourself use debt settlement to your best advantage, then prepare to kiss your debts good-bye.
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The Option of Debt Settlement
Not to be confused with debt consolidation, debt settlement is a negotiation process in which your debts are eliminated, in part or in whole, by a professional negotiating on your behalf. During negotiations, the company may ask you to stop making payments, which may harm your credit score because the payments will be considered late. After negotiations, your creditors will “write off” the part of your debt which they dropped, also hurting your score and cuing Uncle Sam to collect on the “gift income” provided by the creditor. Debt consolidation, on the other hand, usually requires getting a loan of some kind, and works best if you can get a loan with a lower interest rate than your debts. Obviously, if your credit score isn’t especially high or you don’t have an asset to secure the loan, debt consolidation may be out of the question for you. If that is the case, debt settlement is your answer - but it should be used wisely.
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Making the Most of Debt Settlement
First and foremost, you absolutely must understand exactly what you’re getting yourself into - if the company you’re working with cannot clearly explain what is going on, choose another company. Some debt settlement companies do actually have a heart and truly want to help you reach your goals, you just have to find them. You will need to meet certain minimum requirements - usually debts totaling at least $7,500, and payment of certain fees up front. The fees vary from company to company, but there are typically three rounds of fees. The first when you open the account to evaluate your situation, the second to send out letters to your creditors, and the third when negotiations actually occur. Again, if they can’t explain exactly how much you will pay them, when, and why, find another company. Also try to pick a company with good marks from the Better Business Bureau. Find maybe three or four which seem like good options and go over their offers with a fine-tooth comb before making a final decision. Remember, this is your financial future. Best not to leave it in the hands of someone you can’t fully trust.