Escaping debt can be a long, arduous process. Many times, consumers find success in working with the creditor directly on settling the total amount owed, satisfying the debt by paying an amount that is much smaller than what was originally owed. While debt settlement can lift the burden carrying a large amount of debt places on a consumer, it also comes with its negative attributes, as well. In fact, according to new reports, debt settlement can actually end up harming a consumer’s credit score more than it helps.
A debt settlement can lower a person’s credit score by 100 points or more, according to the National Foundation for Credit Counseling. It can take up to seven years to recover from that negative hit.
Credit reports will normally show a negative mark on a person’s credit score for any debts that the consumer has settled for less than the full amount owed. It is for this reason that many financial experts caution against settling large amounts of debt for a substantially lower amount. If the consumer is not too terribly concerned about his or her credit score, this may not be a problem, but if he or she is wishing to receive approval for financing in the near future, this could present a major roadblock. It ultimately depends on the consumer’s overall situation, as well as his or her financial goals.
Debt settlement essentially involves working directly with the creditor or a third-party debt collector to pay off a chunk of debt, thereby erasing the remaining amount owed. Many creditors resort to debt settlement to avoid the expenses associated with pursuing a collection action. They would much rather receive some amount of payment than nothing at all. It is for this reason that many creditors are more than willing to work with the consumer on a debt settlement arrangement.
Debt settlement agencies or companies also exist with the purpose of helping consumers pay down a debt. The Consumer Financial Protection Bureau (CFPB) has strongly cautioned against working with debt settlement companies since many of them are less than legitimate and seek to earn a quick buck rather than help a consumer out of a difficult situation. Many of these companies will charge high fees and encourage consumers to completely stop paying their bills to push creditors to want to negotiate. What results when this happens, however, is the consumer’s credit score will take a significant hit once these accounts are put into past due or collection status. The consumer may find himself or herself in a bad situation with less money than he or she had previously and a much worse credit score.
Another reason a consumer will see a hit to his or her credit score once a debt is settled has to do with how it is reported. Whenever a creditor accepts an amount that is less than what was originally owed, the account itself is not marked “paid in full” on the consumer’s credit report. Some agencies will report it as “payment after charge off” while others will say “account legally paid in full for less than the full balance.” While arguably this verbiage is better than “in collections” or “in default,” it is still not as positive as “paid in full,” especially when it comes to a creditor reviewing a consumer’s credit report to be approved for financing. In fact, this may be more important than most consumers realized as payment history is the biggest single factor when calculating a person’s credit score.
Ultimately, it depends on the consumer’s specific circumstances. If he or she already had a pretty decent credit score, a debt settlement may cause more harm than it would for someone who already had poor credit with a history of late payments and collection actions.
There are options available to consumers looking for alternatives to debt settlement. Working with the creditor or third-party debt collector on a structured payment plan where the debt is stretched over time, resulting in the person paying the account off in full at the end of the plan, may be a viable option. Additionally, considering debt consolidation may be another option if the consumer has decent enough credit to be approved for a personal loan or credit card with a promotional rate of zero percent. Lastly, bankruptcy may also be a better option to explore in lieu of debt settlement if it appears that the consumer will be unable to pay the debt at a lower amount.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
