Debt Settlement and Your Credit Rating

By: Don Tate

Many people start researching debt settlement services thinking they will be a way to settle their debts for pennies on the dollar and once they have completed the program, they will be starting out again with a clean slate. The optimistic marketing of many debt settlement providers helps reinforce this idea and while they do not claim there is no downside to participating in a debt settlement program, they avoid mentioning how using a professional to help settle your debts will impact the relationships with your creditors and the harm it will do to your credit score.

Debt settlement works by making your creditors believe there is a chance you will declare bankruptcy or otherwise default on your loans. This is accomplished by completely stopping your payments. Then, as your late payments start to build up, your creditors start to fear they will be unable to get any money out of you and will be more willing to negotiate a partial payment. As a result of this negotiation, you may be able to talk your creditors into accepting less than you owe.

Debt settlement providers manage this process for you. When enrolling with a debt settlement provider, you agree to stop paying your bills and instead start sending what you would have paid to the debt settlement company. After "aging" your accounts, the debt settlement company will start negotiating with your creditors and when they have successfully reduced the amount you owe, they pay the negotiated amount using money from the payments you have been sending in since getting started with the service. It is a lengthy process, and one in which there are no guarantees, but there are many people who have seen life changing results from using debt settlement services.

But, as mentioned before, there are negative side-effects to using even the best debt settlement services. During the period when you aren't making payments to your creditors, they will be hitting your credit reports with late payments, collections, charge offs, etc. that will almost certainly result in you having a poor credit rating. Even after you pay off your debts, your credit score will be so low that you will have a tough time getting accepted for loans and credit cards. Your low credit rating could even prevent you from getting hired for certain jobs.

It is the devastating effect that working with a debt settlement company will have on your credit rating that makes debt settlement a last resort, only to be considered when being forced into bankruptcy is a real possibility. At this point, your credit score is already crashing so doing more damage pales in comparison to what having to declare bankruptcy will do to your financial future and overall quality of life.

Good debt settlement companies offer a valuable service that has helped many people get the upper hand on their finances and reverse the downward slide into bankruptcy. If your finances are spiraling out of hand and you have already done everything you can to reign them in, then debt settlement may be a good option for you.

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If debt settlement is a good choice for you, TheTopTens provides a list of the debt settlement services to help you get started. If you have already settled your debts, then the list of best credit repair services may be of more use.

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