Will a Debt Settlement Program Damage my Credit Score?

One of the most important concerns that consumers have is the impact debt settlement programs will have on their credit score. The important fact that needs to be understood is that a successful debt settlement program requires the consumer’s creditors to believe that they may not receive any money at all against the debt that is owed. When creditors are under this assumption, they are much more likely to agree to a settlement and to accept less than the total amount owed. Under these circumstances, they will likely believe that doing so represents their best chance to recover any money at all from the consumer from that point forward. The reasoning is that if the consumer were to file bankruptcy, then they would most likely not receive anything against the debt.

Photo by Marcus Metropolis.

There is an important missing piece of information from this explanation that needs to be filled in. How exactly does the consumer (or the debt settlement company on their behalf) cause the creditors to believe that they might not receive any more money from them, and that a bankruptcy may be forthcoming instead? The answer is that the consumer must completely stop making any more payments to the creditors that are included in the debt settlement program. In fact, consumers in a debt settlement program begin making their payments to the debt settlement company instead of their creditors. And of course when consumers stop paying their creditors, the creditors will report them as being late to the credit bureaus. The late payments will damage the consumer’s credit and impact their credit score. So the answer is yes, enrolling in a debt settlement program and following its normal course of action will damage your credit score.

Given that credit damage must be an accepted consequence of participating in a debt settlement program, consumers are encouraged to first explore the possibility of utilizing another debt solution that will not do such serious credit score damage, such as credit counseling (a.k.a debt management). According to the Fair Isaac Corporation (FICO), participation in a debt management plan will have no effect at all on a consumer’s credit score.