Debt Settlement and Credit Rating

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Daniel Cohen

UpdatedAug 14, 2024

Key Takeaways:

Debt settlement is for consumers with large debt burdens
Debt settlement can resolve debts for about half of what you owe
There is a cost to debt settlement, as credit will be negatively impacted
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If I get help to settle my debt, do I lose my credit card?

If you decide to hire a debt negotiation or debt settlement firm, the firm will ask you to close your credit card accounts. The settlement firm will not be able to settle your debts, if you continue using and paying on the account.

Generally, I advise you to make sure that any firm you choose is a member of the AFCC (American Fair Credit Council), the leading debt settlement industry trade group. AFCC members follow all the rules set down by the FTC, as well as a strict set of guidelines from the AFCC itself.

Quick tip:

You can receive a free analysis of your debt relief options from one of Bills.com's pre-screened debt relief providers.

Credit card companies will not settle with debtors until the account is around six months delinquent, in general. This means that you must choose to stop paying your creditors each month in order for the settlement company to obtain a settlement. No credit card company will allow a cardholder to keep an account open after not paying for six months. Nor will a card company allow a user to continue to use an account after agreeing to accept a settlement amount to pay off the balance of the account. If you are interested in debt settlement, I encourage you to visit the Bills.com debt relief resources page.

I hope this information helps you Find. Learn. Save.

Good luck,

Bill

Bills.com

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Debt statistics

Mortgages, credit cards, student loans, personal loans, and auto loans are common types of debts. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Housing debt totaled $12.82 trillion and non-housing debt was $4.88 trillion.

According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 10% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

Each state has its rate of delinquency and share of debts in collections. For example, in Indiana credit card delinquency rate was 4%, and the median credit card debt was $395.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.

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10 Comments

BBill, Jul, 2009

It's probably best for you to close them yourself. Your debt settlement provider is doing you a longer term favor by giving you this advice, since when you finally graduate it will look better when you try to re-establish credit and get back on track if you had closed your accounts yourself, and not the creditor forcing you to close the delinquent accounts.Good luck Geri, and know that any debt settlement program is not always a walk in the park and takes commitment and perserverence.Cheers. bill

GGeri, Jul, 2009

I am going into a debt settle program...They are saying I should close my cards so my credit report states "closed by customer " rather than close by creditor...SHould I do this? Are they going to close my accounts anyway and would it look better for the credit repair at the end if I closed them befor they did?

BBill, Sep, 2008

Creditors usually only settle with account holders who are currently experiencing financial hardship and, in most cases, are already delinquent on their monthly payments. If you are currently in this situation, then your credit is already hit. This is not a good idea if you are considering buying a home. Talk to Amex and see what they have to say about the credit part.

AAdrian, Sep, 2008

I have a credit card debt of $30K with Amex. I'm in a position to "strike a one time payment/settlement" with them for say 50% of the debt. Does this affect my credit score, if so how many points and for how long.....I currently have excellent credit. I'm also looking at maybe buying a home in about 8-12 months. Thanks for the help

BBill, May, 2008

Debt settlement, also called debt negotiation, is a form of online debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of online debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. Therefore, you will have to give it atleast 2 years after the point that you finish the settlement program in order to apply for a mortgage to buy a new home. Debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving lots of money.

AAdrian, May, 2008

I have 7,000 in credit card debt, if I do a debt settlement, and my credit score is already very low is it a good idea to do this. I'm also looking to buy a new home in about 1 1/2 year will it affect me when I try to buy a home, and will it prevent me from being approved for another card in the future.

mmike amstutz, Apr, 2008

I have 26,000 in credit card debt. I want to pay it off but am struggling big time. Should I do debt settlement? I have a 707 FICO and have never ever been late, but I am stressed to the max. My wife is unaware of my debt and it is going to cause personal problems. Should I start saving for settlement payments? Or what?

bbrads, Nov, 2007

You should be able to do this, since the balance will show as zero on your credit report (your creditors won't be aware that you are carrying credit when they go to settle).You will need to confirm this with your debt settlement company provider. I know that Freedom Debt Relief (www.freedomdebtrelief.com) allows this, as long as the card stays below $500.Good luck.

JJohn, Nov, 2007

I'm interested in debt settlement yet wish to retain one credit card that has a zero balance. Am I able to do this or do I have to enter all credit cards into the agreement?

NNate, Sep, 2007

The "hit" will be substantial. The impact will last atleast for the term of the program (2 - 3 years) if not longer. You should opt for settlement only if you are able to abstain from using your credit for any reason for that amount of time.