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We just got an offer from Bank of America that offered us a chance to settle our $ 4000 debt for $ 1200 if we do it in 4 payments. We are delinquent on the account, I believe past 90 days without a payment, so its already affecting our credit report.

By taking this settlement, would it affect my score even more in the years to come as we rebuild our credit?

6 Thoughts on Does debt settlement hurt your credit?
  1. Reply
    Danielle M
    July 20, 2011 at 9:52 am

    Your question is an interesting one, and the answer is:

    It depends!

    Debt settlement could hurt your score, but it can also greatly improve your score. It all depends on what’s going on with your credit right now.

    But don’t worry, I’m going to give you a simple tool right here to understand how credit works so you can know how debt settlement will affect YOU.

    First an example of two clients, James and Anne of Laguna Hills, California, who cut their $ 55,000.00+ of credit card debt down to just $ 29,817 (including fees) through debt settlement. Only 18 months after started their debt settlement program, they were debt free with over $ 2,100.00 a month in CASH FLOW back in their pockets!

    Perhaps even more liberating was checking their credit scores shortly after graduation. James saw his credit score jumped 74 points while Anne’s score jumped 130!!

    Can You Imagine…

    Going from a 520 score just before starting her debt settlement program to a 650 immediately after graduating?

    How could this be?

    Let’s take a look…

    Understanding “how credit works” seems to elude most people. I think it’s that way on purpose, as creditors and the credit reporting agencies make it rather complex and guarded.

    I’ve found a simple analogy will make it clear for you.

    So imagine, if you will, a three legged stool…

    And on this stool are these three legs because your credit is really made up of three main factors.

    Each of these factors account for about one-third of your score, while any one of these factors can cripple your credit worthiness (your actual ability to get a loan) regardless of score.

    Make sense?

    The first leg is your payment history. Your payment history is whether you pay your payments on time, if you have any past due accounts or this kind of thing.

    If you have a perfect payment history, then you have something to lose in this area of your credit. It’s as if the first late payment you get KNOCKS your score out of the sky, and each additional late payment has less and less of a negative affect.

    So if you have at least one late payment on your credit report (you’ve fallen more than 30 days behind in recent times), then you’ve already taken the major hit to your payment history.

    Debt settlement, while causing additional late payments, will not have nearly as severe of an affect on your credit score as it would if you have never missed a payment and maintained a perfect payment history.

    The second leg on the stool is your debt-to-income ratio. This is how much debt service you pay (what you’re obligated to pay towards debt) each month verses your net monthly income.

    Add up all payments you must make each month towards debt, including credit cards, medical bills, student loans, mortgage, auto loans, etc. What’s the total? Divide this amount into your NET (after tax/take home) income.

    You want to keep this ratio at or below about one-third (35%), otherwise it becomes a negative factor that hurts your credit score and worthiness. If your debt-to-income ratio is over half (50%), then you’re CRIPPLED and regardless of your credit score you will have great difficulty obtaining any financing for major purchases.

    NOTE: In the past year due to troubles in the mortgage industry, underwriting guidelines have tightened, bringing down the maximum debt-to-credit ratio to 45% in most cases.

    Through debt settlement, you eliminate your unsecured debt ALONG WITH the monthly payment obligations you have, thus improving your debt-to-income ratio.

    Take your minimum payments on unsecured debt and subtract them out of your debt-to-income ratio to see how big of an improvement debt settlement will have.

    The third leg on the stool is your debt-to-credit-limit ratio or “utilization”. This is how much your current balances are compared to your credit limits.

    The ways this works is very interesting. This is probably the least known factor that affects your credit.

    Basically, each account you have has a credit limit and a current balance. If that current balance is less than 50% of your credit limit, that’s a positive factor.

    Now, if you have an account that’s over 50% utilized with a balance is over 50% of the limit, then that hurts your credit, becoming more severely negative if it gets over 75% of the limit. If your balance gets to the limit, or over the limit, then this is a crippling factor.

    Again, you can have a perfect payment history, always making your payments on time or early, but if you’ve got a maxed-out or over the limit account you’re stuck.

    Through debt settlement your account balances are paid to a zero balance, wiping out any over-utilization and improving this area of your credit.

    To make it simple for yourself, look at each of these three legs… And determine which are GOOD vs. BAD for you now.

    No one can say exactly how debt settlement will affect your credit score, but after working with thousands of people for over seven y

  2. Reply
    EK
    July 20, 2011 at 10:34 am

    It will be better than continuing to let it default… It should show up on your credit reports as “Account paid in full but for less than balance owed”. Make sure you keep that letter to support the settlement in case you don’t see that they have updated your credit file. Also something to note – they will send you a 1099 afterwards that you will have to claim as income on your next tax return (anything over $ 600 that is written off – so figure they are writing off $ 2800 in debt, you will claim that amount on your taxes next year). I say take the deal and get the debt off your back!

  3. Reply
    CatDad
    July 20, 2011 at 10:58 am

    Any settlement for less is a negative factor and will hurt your credit rating…HOWEVER, if this account has not yet been charged-off as bad debt, then the settlement is by far preferable to having a charge-off on your credit report.

    – Get all terms of any settlement deal you reach with creditors IN WRITING BEFORE you give them your money. This letter should state the settlement amount and that the account will be settled/paid in full upon receipt of this amount from you. Keep the letter in a safe place. NEVER accept settlement deals over the phone that are not backed up in written terms.

    – Settled/Forgiven debt is treated like earned income with the IRS…any debt that is forgiven must be added to your next year’s income and you’ll have to pay whatever additional taxes

  4. Reply
    bdancer222
    July 20, 2011 at 11:08 am

    You credit is already damaged by your 90 without payment. This is probably your last chance before the account is charged off and goes to collections. Take the offer. It’s a good deal and will result in the least amount of damage to your credit.

    Be sure you get the offer in writing. You will probably also get a 1099 for the forgiven portion and will have to include that on your income tax return.

  5. Reply
    Stephen T
    July 20, 2011 at 11:44 am

    It shouldn’t. You would need in writing from them that when your account is paid, they will report it as a paid account and not a paid charge off. If you pay it off now, it will be better for you than if you wait till they charge it off. A charge off will devastate your FICO.

  6. Reply
    Azzuan
    July 20, 2011 at 12:25 pm

    With Debt Settlement or Debt Consolidation you can reduce or restructure your personal or business debt, or receive free help to decide which option is best for you, to ultimately achieve peace of mind.

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