How Using a Debt Relief Program Will Hurt Your Credit
How Using a Debt Relief Program Will Hurt Your Credit
Millions of Americans are drowning in credit card debt. Most consumers are looking for ways out of this debt. There are a number of options available for this purpose ranging from bankruptcy to debt settlement. You will find a number of commercials on the television and on the internet advertising several debt relief agencies. While these debt relief agencies can help you negotiate with your creditors to reduce your debt, this debt settlement will have a negative impact on your credit score.
Debt settlement:
Settlement of debt is a legal process through which you can settle credit card debt for an amount lower than the amount that you actually owe to a creditor. Debtors who have huge amount of debt and no possible means of paying them off use this method of repayment in order to avoid bankruptcy. Most creditors offer this option to those customers who are behind their payments and are close to bankruptcy. Creditors opt for this option because in case of chapter 7 bankruptcy are left with nothing but through a debt settlement they can get back a portion of their money.
Effect on Credit Score:
The credit score which is published by the credit reporting agencies like TransUnion, Experian and Equifax shows the way in which the consumer has been handling his financial obligations. A score which is lower than 300 is considered as a bad credit report. However, a score of 850 is considered exemplary. The payment history of the consumer fetches 35% of the scores in the credit rating. With this data in hand it will be easy to understand why a credit report showing a poor payment history and a debt settlement will have a damaging impact on the credit score.
If you have a good reason then you can negotiate a debt settlement on your own. Situations like job loss, medical difficulties, divorce usually earn a sympathetic ear and the chances of getting help increases. However, a debt settlement and late payments will stay on your credit report for the next seven years whereas a bankruptcy will stay for the next 10 years.
Tax effect:
The Internal Revenue Service considers a cancelled debt or a forgiven debt as an income and hence it is taxable. However, there are exceptions to this rule. A knowledgeable tax professional can help you in calculating if the amount that has been forgiven is taxable or not.