Q: How will debt settlement affect my credit?

A. A Debt Settlement Program will have a negative effect on your credit while in the program. If your accounts are already delinquent it may not have much effect. For consumers with unpaid delinquent accounts this makes debt settlement an excellent option over ignoring the delinquent past due account, considering the savings versus paying the past due account in full. The question is; does debt settlement make sense for those who have current accounts, and a good credit rating. Those with a high credit score must weigh the negative impact on credit ratings against the risk of bankruptcy and the potential of being debt free for less than the full balance. Note: even if your accounts are current your credit score may already be negatively impacted by your total debt and debt to available credit ratio; in this case negotiation of the accounts may still be a better alternative than making minimum monthly payments for the next 30 years and still having bad credit.

• While in a debt settlement program, you will receive late marks on your credit as you are not making regular payments to your creditors. Your consumer credit score will be negatively affected during the delinquency period. This occurs for two reasons. First the account is late and is continually reported to credit bureau as the delinquency period extends (60, 90, 120 days). Secondly, the amount listed in the payment due column increases as past due payments stack up. If the accounts are current but the credit score is low due to high balances or a history of late payments, the negative effect on your credit is already affected in your credit score.

• Once your account balance and payment due is settled and reported as a zero balance, your debt to income ratio will be reduced as long as you have not since incurred more debt. These paid/settled accounts that are negotiated look much better on your credit report than unpaid past due accounts. The history of the delinquency may remain, but the account moves from the current derogatory reporting section of the credit report, to the closed account section. As months pass any derogatory history has less and less bearing on the credit score. Some lenders believe that after 12 months the accounts are given very little consideration. It appears that provided all other debts are paid in a timely manner (house, car, and other accounts kept current) the effects of the settlement process are temporary. Remember if you are considering chapter 7 or 13 bankruptcy it will stay on your report for 10 years.
 

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