Does Debt Settlement Hinder or Help Your Credit Repair Goals?

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Today’s guest post comes to us from Ed O’Brien, who specializes in credit repair. His blog, Credit Repair, offers free advice on preparing yourself for a financially responsible future.

Does Debt Settlement Hinder or Help Your Credit Repair Goals?

There are more options for handling debt matters and repairing credit these days than in years passed. But, with the multitude of options available, consumers often get stuck deciding which resources are the best tools for eliminating debt and getting credit back on track – and rightfully so.

There are a number of pros and cons to each type of debt relief resource that is available, and it is important for the consumer to be clear on how different methods affect credit repair goals.

Debt Settlement: A Popular Option

One of the less complicated methods for eliminating debt is through debt settlement. This option has some serious considerations that go along with it because there are two distinct ways to settle outstanding debts.

Not all consumers understand that within the debt settlement process, there are options for accomplishing the task. This is a very important first consideration because one method involves paying a significant price for the process. For those in debt, every penny needs be accounted for.

Option One – Third Party Assistance

There are many companies legitimately handling debt settlement cases. These agencies have counselors that are skilled in negotiating the settlement of debts to your creditors for less than the balance owed in most cases. Because of their working relationship with a variety of creditors, many are able to secure not only a lowered settlement amount but also reduced interest rates, elimination of late payment fees and stoppage of penalty fees.

The debt counselors often offer additional debt management assistance for the debtor to help get finances back on track once high debts have been paid off. The caveat to debt settlement agency help is the high cost often associated with the help. Usually, a percentage of the debt involved in the settlement program is required for help. Additionally, it is important to note that not all agencies are working on the up-and-up, meaning consumers sign up for help and not only end up paying a high fee, but their debt issues only increase as well.

Option Two – The DIY Method

One of the biggest factors with the do-it-yourself debt settlement method is that consumers rarely realize they have the power to do the same thing as the debt agencies, but they can do it for free. Settling debt is certainly no small task but it is an achievable goal that can be accomplished through effort and regular follow up.

Consumers need to gather the information concerning the debts that may be settled including credit cards, medical bills, and other loans. There are some limitations on what debts can be settled for less than you owe including your mortgage, vehicle loans, etc.

Once the total debt has been tallied, a budget needs to be constructed so the consumer knows where they stand financially and how much money they can offer toward settling the debt. Then a call to the creditor is made to negotiate the debts, the reduction in interest, and the elimination of penalties. Even if consumers are not skilled negotiators, they still have the power to deal directly with creditors. Provided a consumer knows how much they can afford to pay to settle the debt, they have the necessary tools to stick with a negotiation. Most creditors are willing to work with customers struggling through financial hardships and believe that getting some money back is better than getting nothing at all.

How Will It All Affect My Credit?

Debt settlement involves the negotiation of your total outstanding balance. Creditors will allow customers to payback a percentage of their debt under the provisions that the payment will satisfy the debt obligation. This is the good news part of the equation. The bad news is that while you are able to get rid of the legal hold of a debt by settling, your credit can take a significant hit in the short-term. Creditors will typically report back to the credit reporting agencies that a debt was ‘settled for less than owed’ or some similar terminology. To other lenders, this credit report data relates that you did not completely satisfy the terms and conditions of your original agreement and therefore are a risk.

While the short-term ramifications of debt settlement do have a negative consequence on our credit scores and histories, the long-term gain after time has passed is significant. Once debt has been eliminated and you are no longer legally obligated to make additional payments on the debts, money can then be allocated in other financially beneficial ways, such as establishing a savings account, planning better for retirement, and doing better than just living paycheck to paycheck.

Credit scores will drop during the debt settlement process but the goal is really more than just paying off debts. The real achievement is learning from past mistakes and avoiding debt settlement and other issues in the future. By taking the steps on your own or with the help of a qualified debt settlement counselor, you can learn a lot about where you were and where you want to be in your personal financial life.

How about you all? Have you used third party assistance to settle debt? Did they offer services that you felt you couldn’t provide yourself? Do you feel it is a rip-off? Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

  • @The two different methods of debt settlement – I feel that for the majority of people, third party debt settlement assistance is VERY MUCH NOT NEEDED. In fact, I feel that it just further complicates the facts of what needs to be done – they need to get their game plan together to pay off money. Period. The end. Calling around to find a debt settlement agency is only going to take additional time and incur more costs.
    • The majority of people looking to reduce their debt I believe fall in to to the category of having debt, and are getting by all right by making the minimum monthly payments, but realize that they are never going to get rid of their debt that way.
    • However, if someone is severely in debt, and simply unable to make their minimum payments and put food on the table, then, I believe that credit counseling and third party assistance would be in order.
  • @How debt settlement affects your credit score – In my experiences, people who are going through debt elimination/settlement do not particularly care what their credit score is. They simply are looking to stop spending and decrease their debt. In their mind, enough of a hit has been taken to their credit score, that it isn’t of much importance to them.

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