The Effect of Debt Settlement
On Your Credit Report
Debtors who are contemplating seeking a Debt Settlement plan are often concerned about the effect their action will have on their credit report. Let's get right to the point. If you elect to enroll in such a plan, unless you have sufficient up-front cash to quickly settle all of your debts placed in the program, you should expect your credit report to take a major hit.
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 a debt settlement program, chances are it's just a matter of time before their credit report begins to deteriorate anyway.
When seeking a Debt Reduction Settlement, by the very nature of the process, your credit report will without question go downhill. It is virtually impossible to negotiate a substantial debt reduction, or for that matter any reduction, on a credit account that is current. 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 usually reported as past due and may eventually charge off. And being past due, the creditor may even elect to take legal action.
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. Once all accounts are settled in full, the consumer can then set out to re-establish a favorable credit rating.
While your desire to maintain a favorable 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 loan or a line of credit.
After you settle your debts and by properly handling your financial accounts, your credit rating will begin to improve. But, even more important, once you complete the debt settlement program, you will have a fresh start and be debt free!
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