We’re all familiar with debt – yes? You’ve had moments you where afraid to answer an unknown number. Or that disturbing sentence “this is an attempt to collect a debt. Any information….” – Yeah you know the one.
You’re not alone. In fact, 77 Million Americans have an account in collections. That’s 1 in 3! In today’s post we will:
- Debunk 2 popular misconceptions about debt settlement.
- Look at the pros and cons of debt settlement.
What is Debt Settlement?
A debt settlement is the process of negotiating a dollar amount with a creditor for less than the amount that is actually owed. For example, if you owe a credit card issuer $10,000 and they agree to accept $5,000 and call it even, you’ve just settled the account.
How does Debt Settlement work?
Through the process of debt settlement consumers are likely able to reduce their overall debt and pay only a portion of what is actually owed to the creditor. When the consumer pays the agreed upon settlement the account will typically be updated on the consumer’s credit report to reflect a balance of zero dollars.
There’s a lot of misinformation floating around the Internet regarding debt settlement. Here are two.
- If I pay the debt it will be deleted from my credit report.
- The longest it can stay my credit report is 7 years.
First of all, collection agencies have no obligation whatsoever to remove a paid account from your credit report. So paying it off does not guarantee that outcome. To make this happen you must first agree upon a settlement. Once the amount is established you can request in writing that the condition of removing the account from your credit report if you hold up your end of the deal. Most agencies will not agree to that condition, but it does happen.
Also, the 7 year rule (statutes of limitations) is real, but it’s not black and white. The fact is, collection agencies try several techniques to extend the time period by which they can collect on the debt. Here’s how it works:
- The 7 year clock starts when the debt is given to the collection agency.
- The 7 year clock can start over once the collection agency makes contact with you.
- The 7 year clock can start over from the time you make your first payment.
- The 7 year clock can start over if the debt is given to a new collection agency.
It’s very unlikely they would try all of these, but common to see one of them being used.
Pros of Debt Settlement
Debt Settlement stops collections calls. When a creditor or collection agency agrees to accept a settlement on your defaulted debt they must also agree to stop pursuing you for the remaining, unpaid amount of the debt. Settling an account can help you say goodbye to annoying collection calls and letters. When you settle a collection account it may also protect you from the possibility of being sued.
Cons of Debt Settlement
After paying a debt, the collection agency will start reporting it as “zero balance” on your credit report. However, in addition to the zero balance, a notation is also usually added to the account which reads something like “settlement accepted on this account,” “partial payment plan,” or “settled for less than full amount.” This has the potential to inflict a large amount of damage to your credit scores, and for a very long time.
As you can see, debt settlement is not a fun game. But knowing the rules will makes things more fair.