There was a time when if one had used the services of a debt counseling agency, that was a serious black mark on the credit report. While it still does have a negative impact on one’s credit rating, the choice to use debt counseling may not have as serious an impact on obtaining credit in the future as it once did.
The reason is that some lenders are choosing to forgive actions that in the past would have been a deal breaker for extending credit. For example, there was a time when if you had a foreclosure, you may have had to wait for ten years before being able to buy another home. Now, depending on the circumstances surrounding the foreclosure, you may be able to buy another home much sooner.
The same forgiveness is sometimes applied to those who used debt counseling. It is important to keep in mind that this is only true with lenders who are able to look at such situations on a case by case basis. When they do, they are going to look to see if you had a habit of poor credit choices, or if there was an usual set of circumstances that led you to need to use a debt counselor.
One mortgage broker even said that, in some cases, he looks favorably upon someone who chooses to use a debt counselor. He said that if the choice was going to a debt counselor for help or choosing to fall further and further behind that he would rather see that someone took the initiative to find a way to resolve the debt in a way that is acceptable to both the creditor and the debtor.
He also noted that if there was a very long history of late payments that that is more difficult to overlook. Still, the use of a debt counselor is not the automatic rejection that it was at one time.
This is great news for those who in the past made on time payments but are now struggling. It means that they can choose to seek help from a debt counselor without worrying that they will never again be able to buy a car, house or obtain a credit card.
Of course, as mentioned above, doing so WILL have a negative impact on your credit, so you still need to carefully consider if turning to a credit counselor is the right choice for you. If there is any way that you can resolve the debt on your own, such as by making special arrangements directly with your creditors that should be the first choice.
If that is not possible then the debt counseling option is far better than declaring bankruptcy or allowing the debts to be charged off.
Part of the reason that it is slightly more acceptable to visit a debt counselor is the overall sad state of the economy right now. With the number of foreclosures skyrocketing, there had to be a bit of an adjustment in the way that underwriters evaluate people’s credit history.
It is not that a foreclosure is not a serious blemish, but because it happened to so many people in so many socioeconomic classes it made some lenders realize that a past foreclosure is not necessarily a predictor of future poor payment performance.
While this is good news for those who have had some trouble with their credit that does not mean that you should take lightly any action that will impact your credit rating. Even if you will still be able to get a loan, credit card or mortgage, you will likely be paying a much higher interest rate than someone with pristine credit.
As mentioned earlier, the decision to use a debt counselor should not be taken lightly, but if you truly feel that it is your only choice before bankruptcy then it may be what is best for you.
If you do choose to use a debt counselor, be sure to stick to the plan and work to get all of the debt paid off – and therefore finish with the counseling – as soon as possible. The sooner you are done with the debt counseling, the sooner you will be able to start working to rebuild your credit score.
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When people realize that they are in over their head when it comes to their debts, many turn to debt counseling for help and advice. In many cases, this is a good move that can save consumers from having to turn to turn to bankruptcy or other drastic measures.
While often a wise move, there are some things that you should know about debt counseling. The first important fact is that not all debt counseling services are the same.
Some are truly there to help consumers that are in trouble. They will work with you and will charge, at most, a very modest monthly fee (some will charge nothing). While debt counseling does affect your credit score, a reputable debt counseling service will not do as much damage as one that is simply out to make money. Below is a description of how each would operate.
Reputable Debt Counselor
This type of debt counselor would sit down with you and have you list all of your monthly expenses along with your income. They would then contact each of your creditors and negotiate payment arrangements. This may include a reduction in the total amount due, stopping or reducing the interest rate and lowering your minimum monthly payment.
Next, they would instruct you how much you would need to pay the agency each month and then the debt counseling agency would pay each of your creditors each month, starting from the month after you join the program.
The "Other" Kind of Debt Counselor
The unsavory debt counselors often handle things a bit differently. The first part of the process is the same, but after you provide the list of creditors and start sending your monthly payments to the agency, the similarities stop.
Instead of sending a payment each month to your creditors, the agency instead holds onto to all of the money that you send until each creditor charges off your account. At that time, the agency negotiates a settlement amount and pays off the account.
Keep in mind that you will still be sending payments equal to the entire amount that you owed during your initial consultation. So what happens to all the extra money? It is pure profit for the debt counseling agency.
Because each of your debts is being charged off, using this type of debt counseling agency is far more harmful to your credit than using the services of a reputable agency.
As mentioned earlier, using a debt counselor will have an impact on your credit score. For that reason, you should weigh all of your options before deciding to you use one. If you simply cannot make at least your minimum payments, you could try to work directly with your creditors.
Some will be willing to temporarily lower your interest rate or minimum payment to help you get through a tough time. Be sure to ask if they will report such activity to the credit bureaus. Some will and others will not.
If there is no way that you can make it work and you have tried dealing with your creditors directly, then using a debt counselor is a sensible next step. Just be sure to choose one that is not going to do more harm than good.
Ask exactly how they handle the payments to your creditors. Be sure that they do not wait for the debts to be charged off before negotiating a settlement amount. You should get all of the details in writing so that there will be no confusion. Also, it wouldn’t hurt to call your creditors just to be sure that they are, in fact, receiving the payments.
Some mistakenly think that a debt counselor is going to help make your debt go away. While the goal of a good debt counseling agency will be to assist you reach your goal of becoming debt free, you will still need to pay the debt.
What a debt counselor will do is help you get a lower interest rate and ease the process of making the payments by having you write one check to them each month.
More importantly, they will help you learn to budget and to better manage your money so that you do not end up in the same situation in the future.
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Negotiating with individual creditors to come up with a balance due that is less than the full amount you owe the lender, is called Debt Settlement. Other words for this process might be debt negotiation or debt arbitration. Once you’ve agreed to the new balance, the goal is to pay the amount in full or set up a reduced payment schedule that you can maintain.
Can I utilize the Debt Settlement process to settle all my debts?
The answer to this question would be no. The only debts that can be negotiated are credit card debts or some unsecured personal loans.
It might be easier to explain what loans and bills you can’t settle debt on. Creditors will not negotiate the balance owed on your home or auto loan. They might renegotiate the interest rate and payment terms, but they won’t change the balance due on the loan. Student loans cannot be settled by reducing the balance due. Your student loan provider might offer a lower or no payment for a period of time, but loan interest will continue to accrue and they won’t settle the debt for less than you owe. Neither tax-liens nor domestic judgment debts can be settled with a Debt Settlement Process.
Your heat, water and electric bills cannot be included in the debt settlement process and if your payments are current and you have been paying the minimum monthly payment…creditors generally won’t settle for a reduced balance.
Some credit card companies have programs in place and specific guidelines to follow. If you or a debt settlement company approach them with a solution, they are very easy to work with. Other creditors have policies that aren’t as open to negotiation.
Should I hire a Debt Settlement Service or negotiate debt settlement myself?
There is no one answer to this. Legally, yes. You are allowed to negotiate a settlement for yourself. A quick search of the internet will give you several websites that provide step by step instructions on how to negotiate with your creditors. There are even scripts of what to say.
As to whether you should do this, you need to ask yourself a couple questions and maybe make a test call or two. The first question to ask yourself is how complicated is your situation? You will need to figure out how much you can pay for monthly payments divided among your creditors or how much the pool of money is for complete balance settlements. Then take one of the smaller debts and make a trial call. How did you do?
If you decide you want help with your debt settlements, the options are to hire a lawyer to act for you, or use a debt settlement company.
If you are considering a lawyer that deals with debt settlement, find out how they expect payment and how long they will work on your accounts. Debt settlement companies have a monthly fee for their service or they might charge an upfront fee to negotiate with your debtors. Some experts suggest you look for a settlement company that will charge you a percentage of the amount they save you. The percentage mentioned was twenty percent.
Does Debt Settlement affect my Credit Score?
It does. But if you are already late on payments and in default, your credit score has been damaged anyway. Settling your debts will be reflected on your credit report, but as you settle your accounts the score starts to improve. Then once you’ve settled with your creditors, check out all the advice on how to improve your credit score and start implement this advice. Actively work to repair your credit buy following suggested guidelines for the things you can control, like paying the new payment amounts on time.
It may take a few years, but following the process will ultimately bring your score up. Some settlement companies have credit repair programs in addition to their settlement services. These programs might have an additional fee, but there might be an advantage to having someone help you through this process. In this day and age your credit report is used for more than just getting a loan. Insurance companies might decide a premium price based on your score, and some perspective employers use the report to verify the character of considered applicants.
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Simply put, Debt Settlement is a way for you to negotiate with your creditors in the hopes of getting them to accept a balance due that is less than the full amount of what you owe them.
Also called debt arbitration or debt negotiation, this approach allows you to reduce your overall debt by agreeing to a reduced balance and then immediately paying this amount in full or setting up a reduces payment plan.
What you need to realize is that the only debts that can be negotiated are credit card debts and sometimes unsecured personal loans. Creditors don’t negotiated new balances on secured loans like auto financing or mortgages. They might re-negotiate the loan to a new term or interest, but they won’t take off some of the debt. Neither can you use debt settlement on student loans. Student loan providers will often negotiate a lower payment or no payment for a time, but interest continues to accrue and they won’t settle the debt for less than you owe. Neither can debts like tax-liens or domestic judgments be settled in this manner.
If you are up to date on your payments and continue to pay the minimum monthly payments, creditors won’t be willing to negotiate a reduced balance. The downside to this is that if you stop paying them with the idea of negotiating a settlement, the balance grows with added late fees, penalties and building interest.
Debt Settlement Negotiation
You can negotiate a settlement for yourself. There are several websites that provide step by step instructions on how to do this, even providing a script of what to say to creditors. You can hire a lawyer to act for you, or use a debt settlement company.
Lawyers will either charge you an hourly rate to negotiate the settlements, or some may have a set fee for this type of service. Debt settlement companies either take a monthly fee for their service or charge a larger upfront fee to negotiate with your debtors. There is expert advice available that suggests you look for a settlement company that will take their payment only if they reach a settlement with your creditor, and then charge you twenty percent or less of the amount they saved you.
Debt Settlement vs. Bankruptcy
If your circumstances have changed and you are considering bankruptcy, you may want to look into Debt Settlement. You can avoid court-mandated control of your funds, payments and dispersal of income, while still reducing your overall debt—sometimes by more than 50%. You wipe the slate clean, or get payments you can handle. Your creditors or lenders get some of their money, and a renewed sense that you intend to payback what you can. By agreeing to a reduced amount, they are hoping you won’t file for bankruptcy. If you file for bankruptcy, the creditors might not get any of the money you owe them.
Debt Settlement and Your Credit Score
In order to get your creditors to settle, you have to already have late or unpaid, payments. So your credit score has been damaged just from this first step. Reaching a settlement is reflected in your credit report and further damages your credit score, but as you settle your accounts the score starts to improve.
There is a lot of advice available on how to improve your credit score. Once you’ve settled your debts, actively focus on following the credit repair guidelines for the things you can control. It may take a little time, but knowing what helps and striving to follow those tips will be worth it.
There are even settlement companies that have credit repair programs as part of their settlement services. Credit repair might require an additional fee. There is something to be said about having someone guiding you during this time, it might help you stay focused and out of more debt.
Your credit report is used for more than just lending purposes so whatever you can do to improve your rating is worth considering. The report might be used by insurance companies to fix a premium price and if you are job-hunting, prospective employers sometimes use the report to verify the character of employees.
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