Debt negotiation or settlement
When you settle a debt, you pay less than the full balance you owe. Since creditors typically won't settle debts with consumers who are making their payments on time, most consumers' credit reports will list late payments before they are settled. On top of that, "most creditors will report the settlement as something like 'paid less than full balance' if you settle the debt before it has been charged off," warns Michael Bovee, community manager for Debt Consolidation Care. (Creditors generally charge off debts when borrowers fall 180 days behind. Charged-off debts are then often then turned over to collection agencies.)
He goes on to explain: "When you settle a charged-off debt, getting it reported (with a) zero balance due will not, in and of itself, help your credit, because the damage has already been done." But it could help you ward off further damage from, say, a potential lawsuit. For an account that hasn't been charged off yet, settling it before it gets to that point can help prevent it from being turned over to collections and adding another negative item to your credit reports.
Brad Stroh, co-CEO of Freedom Debt Relief adds, "Debt settlement hurts people's credit scores but helps their credit profiles. (It's) worth considering, for anyone struggling to pay a lot of credit card debt, despite its negative effects on credit scores. It is far easier to rebuild one's credit than to get out of debt, and people carrying a lot of debt likely have credit problems already."
Credit damage: Severe, will take time to recover
It's well known that filing for bankruptcy will hurt your credit scores. Bankruptcies can be reported for up to 10 years from the date of filing. What's not as well understood is that credit scoring algorithms typically segment consumers in subgroups called "scorecards." So if you've experienced a significant negative credit event, such as bankruptcy, for credit-scoring purposes you are probably being compared with other consumers who have also been though something similar. Not only may that be a bit comforting, it can also mean you have a good shot at improving your credit scores if you make a real effort to rebuild good credit after your bankruptcy is discharged.
It's also worth noting that Chapter 13 bankruptcies, where you typically pay back some or all of your debts over a period of three to five years, may be a little easier to recover from, at least as far as your credit is concerned. That's because they come off credit reports seven years after the date of filing. So if it takes you four years to complete your Chapter 13 plan, you have to wait only three more years before the bankruptcy disappears from your reports. (Financially, though, you'll probably end up paying more in a Chapter 13 bankruptcy than in a Chapter 7, where you wipe out all or most of your debts, so make sure you discuss both options with a qualified consumer bankruptcy attorney.)
Credit damage: Severe, will take time to recover
Getting back on track
Whichever method you choose, keep in mind that the ultimate goal is to pay off your debt so you can save and invest for future goals. The hit to your credit may be worth it if it means you can finally get your balances to zero. Monitor your credit, consider getting a secured card, and keep it in perspective.
"People just worry about their credit too much," says Fox. "If your couch is on fire, would you not throw water on the fire because you don't want to damage the upholstery?"
More from Credit.com:
VIDEO ON MSN MONEY
I chose "negotiation and settlement" for my relief of debt. This allowed me to pay what I owed without paying all the late fees and interest which were enormous. I had 4 credit cards which totaled about $20,000 and I paid it off in 3 years all except one, Bank of America which was a hard ball to crack. For the 3 years they refused to even talk to my negotiator. I did not have an attorney because I couldn't afford one but I had daily contact from the company I went with.
I was schooled in what to say to creditors when they called, I was told about the laws of what the creditors could and could not do. Did you know it's against the law for creditors to call you at your place of work? 99.99% of the creditors action is intimadation ! I even had to go to court and was schooled on what to say, how to type my own court forms and when I left the court room I knew Perry Mason couldn't have done better. Bank of America finally wrote off the balance they thought I owed. My credit is good now.
Having a lower debt to income percentage (DTI) does indeed help you qualify for new credit products and will raise your credit score over the long term as compared to having balances still owed and unresolved. My statement about the act of settling a debt "does not in and of itself" raise your score in the above article remains true.
I cover the DTI issue combined with debt settlement and access to new credit products fairly thoroughly in an article on the Consumer Recovery Network site. The article compares credit score impacts with debt settlement, bankruptcy and credit counseling services.
I am unable to post a link to the article. If you do a search for the following phrase using the quotes, it should show in the first search results:
"your credit report and score is going to get clobbered"
Michael Bovee ofDebt Consolidation Care is wrong when he says "when you settle a charged-off debt, getting it reported (with a) zero balance due will not, in and of itself, help your credit, because the damage has already been done..."
In fact, about 30% of your credit score is based on the amount of debt you are carrying. So, getting the balances down to zero DOES in and of itself help the credit score.
And this guy is supposed to know credit? Watch out folks!
I have always believed that a Credit Score doesn't measure behavior....rather it 'controls' behavior......Think about it.....you close an account; start paying cash for purchases; pay off balances; obtain a new credit card and not use it; don't incur anymore debt......see what happens to your credit score......you won't be able to buy anything on credit because the score(s) will be so low.
Keep spending America....keep the same banks in business that we bailed out and now are on spending (oh wait, investment) sprees, once again.
Want to blame someone.....take a good look in the mirror.
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