How Long Will the Debt Settlement Process Take?

When you’re overloaded with debt, you may be able to avoid bankruptcy by settling your debts with your creditors. In this process, known as debt settlement, your creditors agree to let you pay a lower amount for your debts. You can often reduce your debts by 40% to 60% by negotiating a settlement agreement with your creditors. Once you’ve paid the agreed settlement amount, you’re no longer obligated to pay the remaining part of the debt. If you’re thinking about using debt settlement as relief for your debt, you understandably have questions about how the process works.

Using a Debt Settlement Company

You can settle your debts two ways – you can use a debt settlement company or you can settle debts on your own. When you go through a debt settlement company, the company negotiates with your creditors on your behalf. You might hire a debt settlement company if you’re not confident in your ability to negotiate a settlement. Here’s briefly what happens once you hire a debt settlement company:

• Give the settlement company the list of debts you want to settle.
• The settlement company estimates a settlement amount and a monthly payment amount that includes a debt settlement enrollment fee.
• You begin sending monthly payments to the settlement company.
• If you’re current on your accounts, the debt settlement company waits about 4-6 months before attempting a settlement offer.
• Once a settlement offer has been reached, the settlement company pays the settlement based on the offer.
• Your settled accounts are updated on your credit report as “Paid-Settled.”.

Settling Your Own Debts

When you settle your own debts, the process is very much similar to what it would be if you hired a settlement company. You start working with your creditors to settle your debts. Unfortunately, few creditors settle on debts that are current, so if you want to negotiate a payment settlement, you might have to let your bills get behind by a few months. Keep in mind each month your credit score is affected each time you miss a credit card payment. After your bills are a few months delinquent, you attempt to negotiate a settlement with the creditors. Many already have a predetermined settlement amount based on how delinquent you are. When you reach an agreement, you put it in writing and send a copy to the credit card company. Then, you pay the settlement as agreed. Your credit report is updated to reflect that your accounts were settled rather than paid in full.

What Happens to Your Credit

If you have a good credit score, debt settlement will make it worse. If you already have bad credit, you might see a small drop in your credit score, if there’s any drop at all. The first thing that hurts your credit is the delinquent credit card payments. Remember that creditors are seldom interested in settling current debts, so you might have to let your payments go 90-180 days late before you can negotiate a settlement. Not only that, the “settled” payment status hurts your credit. The debt settlement information will remain on your credit report and influence your credit score for seven years from the date it was posted.