How does “settled for less than full balance” affect your credit?

If your goal is to get out of debt, then you are likely to consider a settlement plan as a solution that can help. A debt settlement plan is a useful way to get your financial situation back on track if you are struggling with high-interest, unsecured debts. Despite the fact that it can help, you need to understand how the process works and the impact it will have on your credit rating before you are able to make an educated decision about your debt relief solutions.

How Settlements Work:

When you settle for less than the full balance on an unsecured debt, you are eliminating the debt through a negotiation process. You ask the creditor on the account to forgive part of your debt in exchange for you paying a lump sum of cash for the proposed amount. The creditor agrees to your proposal, and then you make the payment. After the payment, your account is considered settled, and you no longer need to make further payments to the creditor.

Before you can qualify for a settlement plan, you will have defaulted on your debts. Creditors will only accept a proposal if you are not making payments because you are struggling to manage your current expenses. If you are not struggling with your payments, then the creditors will expect you to continue making monthly payments.

The Impact on Credit:

When you decide to settle your unsecured debts, it will have an impact on your credit rating. By understanding the impact, you are able to make an educated choice about whether settlement is the best solution for your situation.

Debt settlement will have a temporary negative impact on credit. While the impact is negative, you are not likely to see extreme changes. Since you must already be in default before you qualify to settle the account, your credit score has probably already taken a hit from the struggle to manage your debts. The settlement process will cause a drop in the score, but it is primarily the result of continuing to miss payments throughout the process of negotiation.

After the account is settled, you are no longer responsible to make further payments on the account. As a result, you can begin rebuilding your credit immediately.

In most cases, you will be able to apply for a new loan or credit card within 12 to 24 months. Since a settlement does not have the extreme negative impact of a bankruptcy, it is possible to rebuild your ratings within a relatively short period of time.

Other Settlement Benefits:

If you are looking for debt relief solutions, then settlement is the best option to help you get back on track financially. While it does have the short-term impact on credit, the benefit of immediately working on improvement is a key factor that sets settlement apart from other options.

Beyond that basic advantage, you will also have less stress when you start a settlement program. During the negotiation process, you strive to save to pay the lump sum. As soon as the amount is paid, you no longer owe money to the creditor. As a result, you will have less stress over time.

Settlement is not only applied to high interest, unsecured loans. If you have a high cost medical bill, then you can still work on a settlement plan. Any debt that is not secured with an asset is eligible for settlement, including your hospital bills.

Time is another benefit of settling. On average, you can become debt free within 24 to 48 months, depending on the number of unsecured debts you need to negotiate and the amount of funds you are able to save. Other debt relief solutions take much longer before you become debt free and do not save you as much.

Settling your debts for less than the full balance is a useful tool when you are struggling to make your payments. You do not need to continue struggling or worry that your credit will take a long-term hit. Settling has a temporary impact and offers you the ability to get your finances back on track.