Debt Relief: Impact on Your Credit Score

When it comes to finances and debt management, your credit score (and how to improve it) is what is on most people's minds!  To some, a credit score can really impact how they view themselves.  As the third installment of our blog covering various debt relief options, we take a deeper dive into how your credit score may be impacted by how you choose to resolve your debts. To get a personalized evaluation of your options, we offer a free consultation with a licensed attorney to thoroughly review your available options.  We offer several options to meet your long term financial goals.  Call us today at 866-261-8282 or schedule a consultation online. Before we get in to each resolution option, here is the overview of the various components that make up your credit score according to FICO:  

What are the Credit Implications of Debt Resolution?

• Debt Settlement: Debt settlement attempts to reduce a debt by offering a lump sum payment.
  • Impact on your credit score: This depends largely on your circumstances outside of the settled debt.
    • If you primarily owe a large amount of money to a few creditors and have the available funds to offer a settlement, than this could help you to reduce your debt-to-income ratio and stop late reports to the credit bureaus if the debt is resolved.
    • If settling a debt(s) is going to create other budget shortages or cause to you take on new debt (i.e. a loan) then it probably won't help you to appreciably improve your credit score.
    • Remember, there are tax implications to settling debt for less than what is owed. You may have to pay taxes on whatever amount the creditor forgives under the debt settlement.  Always speak with a tax professional regarding the implications of a debt settlement prior to entering into any agreement.

• Debt Management Programs:
  • Impact on your credit score: In general, Debt Management Plans (DMPs) will hurt or depress your credit score until the debt is completely resolved.  Even though you may be making repayment efforts, those efforts do not stop your creditors from reporting that you are delinquent on your debt(s).
  • Many debt management programs may last for more than 4 to 5 years. While you may be in the process of repaying your debts, the creditor may still be reporting the payments as late because they are less than the regularly scheduled payment.  

• Chapter 7 Bankruptcy:
  • Impact on your credit score: By filing for Chapter 7, you are effectively wiping the credit slate clean.  It is like making a fresh start with your credit.  Your score make take an initial dip, but recent credit report data shows a positive impact on your credit score within 12 months of filing (an average of 60+ points).  This is due to the reduced debt-to-income ratio (30% of your credit score) which creates less risk for your creditors and an end to negative payment history (35% of your credit score) because the debts have been resolved with the court discharge.

• Chapter 13 Bankruptcy:
  • Impact on your credit score: Chapter 13 bankruptcy is designed to help you to improve your credit over the length of the plan.  Number one, filing a Chapter 13 stops negative reporting as soon as you commence your first payment.  The program also established a structured payment plan that creditors are forced to accept that provides regular and timely payments to your creditors.  This positively impacts 35% of your credit score.

Secondly, the Chapter 13 reorganization plan focuses on debt reduction - prioritizing secured debt obligations, such a home or vehicle, before unsecured debt obligations.  Not only does this ensure that you keep the things that are most important to you, but meanwhile you are also reducing your debt-to-income ratio.  This accounts for another 30% of your credit score.  As illustrated, the Chapter 13 has a built-in ability to bolster your credit score over the course of the repayment plan.

Discuss Your Questions with a Debt Resolution Professional

There are many choices for debt resolution and also many considerations in determining the right choice for your circumstances.  We offer a free consultation to explore these options.  Call us today at 866-261-8282 to speak to a licensed attorney or schedule a time online.