Debt settlement is the process of paying some of what you owe to either a creditor or collector. Settling a debt effectively cancels it. The settlement option has become more common over the past few years, thanks to aggressive advertising. Settlements are reported to the credit reporting agencies and considered serious derogatory items by FICO and other credit scoring systems. They’ll likely result in lower credit scores, though most debtors are already in arrears.
How To Settle Your Debt
Almost all creditors, collectors and the IRS will consider settlements, because it’s wiser to accept a reduced amount than to get nothing if the debtor files for bankruptcy.
Settling with a creditor is not unlike burning a bridge. Certain lenders will effectively black list you from their business. If you work for a company that offers you a business credit card from one of these lenders, you may suffer an embarrassing rejection.
Settling with a collection agency is comparatively painless. Most collection agencies purchase the defaulted debt from the original creditor for pennies on the dollar. While you technically owe them the full amount, they will certainly offer to accept a lower payment. This is not only a viable solution for you, but a profitable one for the collection agency, which will make a tidy profit in any case.
Settlement Can Be a Bad Choice
Settlement can sometimes be a bad choice. Third party settlement company agreements are almost always inadvisable. Many of them are dishonest, and even the legit players cannot be trusted about their service’s full and true impact
on your credit—or your exposure to creditor lawsuits. You can search for trustworthy local debt counselors on the NFCC (National Foundation for Credit Counseling) website by entering your zip code.
You can do everything a settlement agency can do on your own, and save yourself a hefty fee. This is a benefit, because some lenders, such as American Express, will not work with debt settlement companies.
Bankruptcy May Be an Option
Sometimes, bankruptcy is a better option than settlement, especially if you are unemployed and can’t afford even modest settlement offers. It’s a recognized and legal way of protecting yourself from creditors. While it’s not always the worst option, it should be your last, since rebuilding your credit will take a decade.