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Opting for debt settlement? Make sure you know these 6 myths/truths

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By: Good Nelly
on 1st Oct,2015

Check out 6 myths and truths regarding debt settlement. It will help you make the right decision regarding whether or not to opt for settlement.

Are you facing difficulty to repay the outstanding balance in full on some of your accounts? Well, in this scenario, debt settlement is a viable option. In this process, either the debtor or a settlement company, on the debtor’s behalf, negotiates with the creditors and/or collection agencies to settle the accounts through reduced payoffs.

However, it’s quite necessary to be aware of the truths against the myths regarding debt settlement. This’ll help you make the decision knowing fully well about the pros and cons of settling debts.

Check out 6 myths and truths of debt settlement:

1. Myth - Settling debt is a bad idea

When you, the debtor, aren’t able to repay the outstanding balance on any of your accounts, then settlement is a smart financial move. Doing so, you can get rid of the debt and focus on managing your other accounts in a better way. Settling debt is definitely a better alternative than ignoring the collection efforts. If you ignore the collection efforts, a judgment can be filed against you. So, settling the debt can protect you, the consumer, from the “legal” collection attempts, annoying collection calls, and you can save a significant amount of money, too.

2. Myth - Debt settlement won’t negatively affect your credit score

Debt settlement can lower your credit score by several points. This is because, first of all, in all probability, when you opt for debt settlement, you’ve already been delinquent on that account(s). So it’ll have an adverse effect on your credit score. Moreover, when you settle your debts, the account statuses get updated as “Paid as settled”, which isn’t favorable for your score. However, settlement can help you get rid of some of your debts. And, once you settle the debts, you can manage your other accounts efficiently and add positive information in your credit reports. After a certain time, you’ll be able to increase your score.

3. Myth - Once you settle a debt, it is removed from credit reports

Any negative item is supposed to remain in the credit reports until it’s required to be removed under federal law. Usually, a negative item remains in reports for about 7 years. As per FCRA (Fair Credit Reporting Act), an account isn’t supposed to be removed from reports since it has been paid. However, often consumers opt for “Pay for delete” arrangements with collection agencies. Though it’s not illegal under the FCRA, yet it actually violates the service agreements between the credit bureaus and the collection agencies. There are chances of a collection agency losing its ability to report accounts if it’s caught granting “Pay for delete” settlements to the consumers. Therefore, it’s better to not pay heed to such suggestions.

4. Myth - You can’t settle debts on your own

It is not necessary that you’ll have to get professional help in order to settle your debts. You can do it on your own and save the money that you otherwise would have to give to the settlement company. However, make sure you know the right negotiation skills to settle debts with creditors and collection agencies.

5. Myth - Your unpaid balance on an settled account is reflected in the credit reports

It is not true. When you negotiate for a settlement amount and you pay it off, the credit report is updated showing zero balance against the account. When an account is settled, the debtor owes no money to the creditor unless he/she has foolishly agreed to pay the deficiency balance. In reality, the credit report is updated showing zero balance against the account with a notation “settled for less than full balance”.

Know more: Credit report and score - 6 Important facts you might not know

6. Myth - You can settle each and every debt you owe

No, you cannot settle each and every debt you owe. For example, you won’t be able to settle taxes you owe, student loans, child support and alimony.

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