How Does Debt Relief Affect Your Credit?

The unrelenting pressure of overwhelming debt can cause all kinds of problems outside of the financial realm. It can affect your love relationship, your familial interactions, and your physical and mental health. You know you need debt relief, but worry that pursuing it may further deteriorate your credit score. In this blog post, we will examine the different kinds of debt relief and their implications for your credit.


Debt Management – What Is It

With debt management, the entirety of your financial situation is reviewed by a credit counselor, who then creates a debt management plan for you to follow. Generally these are for terms of three to five years, and often you must agree not to seek any additional credit during the time that the debt management plan is in place. Some organizations may take control of your monthly payments, making them on your behalf. You will pay a monthly fee for the service.


Debt Management – Credit Implications

The fact that you’re engaged in a debt management plan will be noted on your credit report. If you adhere to the regime for the entire time, your credit score should not be affected. However, at least half of clients do not successfully complete the plan. Obviously, failing to complete a debt management plan would have negative implications for your credit score.


Debt Settlement – What Is It

Debt settlement differs from debt management in that the organization you work with negotiates with your creditors on your behalf to decrease the amount you owe. Sometimes, they offer a lower lump sum payment to the creditor; sometimes, they seek debt forgiveness or lower interest. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also any forgiven debt is reported to the IRS who treats that as income.


Debt Settlement – Credit Implications

Debt settlement companies are not concerned with your credit report. Their job is to get the current debt lowered or forgiven. Most debt settlement companies ask you to suspend payments to your creditors while they negotiate on your behalf. This strategy has a tremendously negative impact on your credit report since the most significant factor is payment history.


Debt Consolidation – What Is It

In its most basic form, debt consolidation combines multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan.


Debt Consolidation – Credit Implications

Because you are taking out an additional loan, your credit report will reflect a “hard inquiry” and that will lower your credit score. Often, your credit score decreases by a relatively small amount, and that decrease is temporary.


The ultimate debt relief, of course, is filing for bankruptcy. The general fear that filing for bankruptcy means the end of ever acquiring new credit or home ownership is unfounded. The experts at Burr Law can talk you through the different options and the various implications for your credit.