A lot of people in the US are dealing with their debt problems but with the abundance of debt relief options available to the US debtors are unaware of the impact of the debt solutions on their credit score. A lot of the debtors in the US choose to file bankruptcy than going for settling their debts through debt settlement. Debt settlements and bankruptcy affects the credit score of an individual drastically. However, it must be considered which option has a worse impact on your credit score before resorting to one. Read on to educate yourself on the varied ways in which both debt settlement and bankruptcy can affect your credit score.
How does debt settlement affect your credit rating?
You can only prevent legal action against you only if you reach an agreement with your creditor and meet the terms and conditions of the agreement. This means that you have to negotiate cleverly with your creditor and make sure that he agrees to cut off your debt burden and lower the principal balance you owe them. Debt settlements need to be made within the first few months of the initiation of the collection activities.
You have to start making a single monthly payment to the debt settlement company that will be transferred to your creditors in due course of time. However, this is for you to know that paying off your debt is much better than not paying it at all. Therefore, debt settlements do have a negative impact on your credit score but most debt experts say that it is a better option that filing bankruptcy.
How bankruptcy affects your credit score?
Bankruptcy should not be your answer if you have one kind of debt. If you’re considered as insolvent or completely unable to pay off your debts, then you’ll be better off by getting in touch with your bankruptcy attorney and seeking immediate protection from all credit collection activities. You might become surprised to know how bankruptcy affects your score.
Your credit score will then be calculated on the basis of your payment history but it will be compared with your peers. As you’re declaring yourself totally bankrupt in front of everyone, this will massively affect your credit score. You might be astonished to know that the stain on your credit report will remain on your report for the next 7 years. This will jeopardize the chances of obtaining new lines of credit unless you start maintaining your credit score after filing bankruptcy.
You must be aware of the fact that the lending industry is entirely based on your credit score. Therefore, before taking a decision on your finances, make sure you consider the after-effects on your score. After reading the concerns of this article, you must have been intrigued that debt settlements have a lesser impact on your credit score than bankruptcy.