Many consumers don’t even know debt settlement is an option for eliminating high credit card debt; and when they find out, it seems too good to be true.  Just to give you one example of a debt settlement success story from my debt relief law firm, our client owed Bank of America $11,134.27. After I explained her significant hardships, Bank of America offered to settle the matter for $3,000. Our client paid only approximately 27% of the total debt amount she owed and saved a little over $8,000.00 on this account. This is a huge savings, but begs the question – does debt settlement hurt your credit?

Will Debt Settlement Affect My Credit Score

In order to reach a debt settlement, the first step is that the consumer needs to stop paying their credit card bill for 180 days.  At this point, the creditor qualifies your account as a “charge-off”.  A charge-off means the bank determined that the debt due by a consumer is unlikely to be collected. Federal regulations require creditors to charge-off an account after 180 days of delinquency and the banks get tax exemptions for the debt. Creditors view charge-offs as part of the cost of doing business with consumers. A charge-off does not mean you no longer owe the debt. The debt is still legally valid and subject to collection and to state laws that limit the amount of time that a creditor can legally collect on the debt.  For more information on how a debt settlement works, visit my FAQ Debt Settlement or credit card debt relief pages on my website.

 

At this 180-day benchmark when you go delinquent on your accounts, your credit score will take the biggest dip. The higher your FICO score prior to defaulting, the more significant the drop. If you’re already in default or have a low FICO score, the drop is not as dramatic.  This is also the point where I can reach the best settlements for my clients.  For instance, our client owed Citibank $14,055 on three separate accounts. After he stopped paying them, the accounts were eventually sold to the Northland Group, Inc. debt collection agency. We negotiated with the Northland Group and they agreed to accept $4,216.00 (30% of the amount claimed due) on all three accounts, payable over a short term of 3-12 months.  We saved our client $9,838.35 on these three accounts.

 

Once the debt is settled, usually credit reporting agencies will mark your account as “settled for less than full amount due” or “settled.” Either of these is better than a charge off, which will be removed once settled.  I have seen credit scores start improving within 2 years of a settlement, depending on other positive activity on your credit report. 

 

How Bad Is Debt Settlement For Your Credit

Let’s think long-term when asking “how bad is debt settlement for your credit”?   What if you decide not to do a debt settlement, but you still can’t pay your debt?  You are left with credit card debt and a badly damaged credit score if you miss payments or have to declare bankruptcy.  If you chose a debt settlement, your debt is taken care of and your credit score will start climbing back up.  And despite what you may be told, you will start getting pre-approval letters for new credit cards before you know it. Possibly even from the same creditor you previously settled with.

 


Daniel R. Gamez, an attorney focusing exclusively in debt relief, is licensed to practice in all state and federal courts in California and Texas. Mr. Gamez owns and operates the Gamez Law Firm in San Diego, CA. For more information, please contact Daniel Gamez at 858-217-5051, daniel@gamezlawfirm.com or use our online contact form. Stay updated with the latest debt relief tips by following on Facebook and Twitter!