Debts that have been charged-off or sold to collections agencies are extremely toxic to a borrower’s credit report. Entries listed as “charged-off” or “collections” are like pieces of radioactive waste. Creditors will not touch a borrower whose credit report has these entries listed. Debt delinquency is a serious financial condition that can result in the borrower being cut off from almost all forms of credit. Debt settlement is an unregulated procedure that can potentially reduce the amount of debt owed by a significant percentage. For example, a borrower who settles a $100,000 debt for 54% only has to pay the creditor $54,000.
Settling a charged-off debt or a debt that has gone to collections changes the listing on the credit report to “settled”. This can result in an improvement to one’s credit score. Even if the borrower went into the debt settlement process with bad credit, settling his debts does not do any more damage to his score. In fact, under certain circumstances the credit score is actually raised by settling debts. When the borrower has decent or good credit, using debt settlement can harm his credit score significantly.
Borrowers with credit card debt problems are able to settle those debts for less than the full amount. A good debt settlement company can even get creditors to request that negative information be removed from a credit report. This is done in exchange for the settlement. This tactic usually only works when the borrower is seriously delinquent and has not paid his creditors for 90 days or more. Debt settlement companies negotiate with creditors to request that the entries they report to the credit bureaus are marked as “settled” or “paid” in exchange for the settlement.
Unfortunately, the end results of debt settlement can leave the borrower worse off. Future creditors will not view a borrower with settled debts favorably. It does not matter what type of debt was settled. Credit card debt problems that were settled for less than the full amount will follow borrowers around for quite a while. Depending on the length of the delinquency period, settled debts can stay on a borrower’s credit report for up to seven years after the first date of delinquency. It is important to note that this has nothing to do with the settlement itself. Debts that are delinquent longer than 120 days automatically fall into the seven-year category.
Debt settlement, like bankruptcy, is a last resort for borrowers who are in trouble with their creditors. The process varies considerably in terms of time. The purpose of debt settlement is to arrive at an amount mutually acceptable to both creditors and borrowers. Settling a debt can improve a borrower’s credit score only if they have been delinquent for so long it cannot hurt their credit score even more. Aside from this circumstance, debt settlement usually has a profoundly negative impact on a borrower’s credit report.