Reflects Better on a Credit Report,
Debt Management or Settlement?
Article by Daniel Gelinas
Debtors who are contemplating enrolling is a Debt Management Plan or seeking a Debt Settlement are often concerned about the effect their action will have on their credit report. Let's get right to the point. Should you elect to enroll in either program you should expect your credit report to take a hit, especially during the initial stages.
For those with an already tarnished credit history, this should be of little concern as the effect will be inconsequential considering the consumers's existing report. For those with good credit, it must be realized that if they are indeed a candidate for either program, chances are it's just a matter of time before their credit report begins to deteriorate anyway.
Debt Management Program
Enrolled in the Debt Management Program, during the first 3 months or so, accounts may run late and are typically reported as being past due. This is simply a result of the process and often cannot be avoided. Luckily, most accounts are re-aged after making 3 consecutive payments through the debt management agency and as a result, thereafter will be reported as being current. Therefore, as along as payments are being made as scheduled while in the Debt Management Program, once an account has been re-aged, a good payment history will be established, eventually resulting with a favorable credit report.
Understand, however, that not all creditors will re-age accounts. This is especially true of installment loans and 30 day accounts, such as, gas cards. Thus some accounts may continue to be reported as past due and may eventually charge-off. A "Charge Off" status, considered very derogatory, may remain on the report until the account is finally paid off.
In addition, most creditors will report the account as being paid through "Credit Counseling" or "Under Debt Management" and as a result, many lenders will not extend credit upon seeing the notation. As each account is paid off, however, the notation should be removed. Once all accounts have been paid in full, and as a result, all notations removed, assuming the client has made payments as scheduled, the report should receive a high credit score.
Debt Reduction Settlement
When seeking a Debt Reduction Settlement, by the very nature of the process, your credit report will most likely go downhill. It is virtually impossible to negotiate a substantial debt reduction, or for that matter any reduction, on a current account. And because most debtors have no choice other than electing to cease making payments until they have the funds to settle their accounts, typically one at a time, these accounts are typically reported as past due and may eventually charge off.
In negotiating settlements, however, at least when going through a professional agency, the settlement agreement with the creditor is worded such that the account be reported as "Settled-in-Full," "Paid-in-Full," or similar terms. It is our understanding that this results in a neutral rating, neither adding nor subtracting points from a credit score. Once all accounts are settled in full, the consumer can then set out to re-establish a favorable credit rating.
Reflects Better on a Credit Report?
It is difficult to say, especially in a general sense, which program has a greater negative or positive effect on one's credit report because each situation is unique. It depends on who your creditors are, the type of accounts, your current credit rating, how long it takes to pay off each account, whether a creditor actually reports the account, and if so, how the creditor elects to report the account, and many other factors.
In the author's opinion, in most cases, the Debt Management Plan tends to have a milder effect because most accounts are typically re-aged. Whereas, in seeking a Debt Settlement, accounts are never re-aged and tend to worsen until they are settled.
On the other hand, however, in the Debt Management Program accounts are typically marked as being "Under Debt Management" which lowers a consumer's credit rating. While the notation will be removed as accounts are paid off, in the Debt Management Program it typically takes 5 to 6 years to liquidates all debts. Debtors seeking a Debt Reduction Settlement are often able to settle their debt much faster, typically within 6 to 24 months. As a result, although their credit report may take a big hit in the initial stages, as each account is settled their credit rating improves, and within a much shorter period of time their credit report may be entirely cleaned up.
While desiring to maintain a good credit report is certainly prudent and admirable, if you are heavily burdened with debt your prime focus needs to be on becoming debt free. Once you are debt free, your debt-to-income ratio will be substantially reduced, and this in itself will be a large step in regaining your ability to secure a line of credit.
As you pay off an account in the Debt Management Program, or settle an account with a Debt Reduction Settlement, your credit rating will begin to improve. And, most important, once you complete either program, you will have a fresh start and be debt free!
To learn more about debt management and debt settlements, we suggest that you read, "A Debt Management Program or a Debt Settlement: Which alternative is right for you?"
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