- Debt settlement is the process by which an individual agrees to pay a creditor a lower amount than the balance he currently owes. In return, the creditor agrees not to pursue the unpaid portion of the debt.
- Just because a debt is settled, that does not mean that it disappears. Unless a written agreement states otherwise, a creditor may forgive a portion of the debt on its books but still sell the unpaid balance to a collection agency.
- Settling an old debt will result in the debt being updated on your credit report. Because a derogatory credit report entry has less of an effect on your score as it ages, when it updates it will lower your overall credit score.
- When a debt is settled, the creditor will report to the credit bureaus that the account has been "settled" rather than "paid." Accounts marked "settled" are viewed negatively by future lenders.
- Some debt settlement companies will hold the payments you make toward your debt in order to negotiate lower balances with your creditors. This can sometimes result in the debt being charged off or a lawsuit from a creditor.
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