Does Debt Relief Impact Credit Score?

Your credit score is an up-to-date snapshot of your financial life. In the United States, there are 3 three major credit bureaus that compile and issue credit reports for consumers: Equifax and Experian, and TransUnion. These reports result in a FICO credit score which determines viability for lending. Does Debt Relief Affect Credit Score?

Bankruptcy and Does Debt Relief Affect Credit Score

Debt Settlement or Bankruptcy

If you’re unable to dispose of your debts by adhering to an aggressive payment schedule or using a credit counseling service, you’ll have two principal debt-relief options: debt settlement or bankruptcy. Both of these methods of debt relief can have serious implications for your credit score. Unfortunately, a temporarily-diminished credit score is the necessary price of a fresh financial start. Does Debt Relief Affect Credit Score?

Chapter 7 Bankruptcy

Bankruptcy is a powerful debt-relief tool. When you declare Chapter 7 bankruptcy, the bulk of your assets may pass into the control of a court-appointed trustee for division among your creditors. Since your secured creditors may be entitled to seize or sell the assets that underlie their loans, you may not escape from the Chapter 7 bankruptcy process with your car or house.

Since bankruptcy can linger on your financial record for seven to 10 years, it’s not advised except in the direst of financial circumstances.

In addition, your credit score will take a serious hit after your bankruptcy declaration. The amount by which your credit score drops once you’ve declared bankruptcy will depend upon its pre-filing value.

Your credit score is essentially a “risk profile” that exists to predict the likelihood that you’ll make poor financial decisions. As such, a “surprise” bankruptcy declaration that blindsides your creditors will affect your score far more than an “expected” declaration that comes after you’ve accumulated multiple delinquent loans and maxed-out credit cards.

If your credit score is 800 immediately before your bankruptcy declaration, it could drop by up to 250 points. If your credit score is a more modest 600, it might drop by only 150 points. Of course, the end result of either scenario will be the same. In either case, you’ll find it far more difficult to procure reasonably-priced loans and lines of credit following your bankruptcy.

For several reasons, many financial professionals consider debt settlement to be a superior alternative to bankruptcy. One of the principal reasons is its relatively mild effect on the typical borrower’s credit score.

When you enroll in a program of debt settlement, your credit score is all but guaranteed to drop. The same basic rule that governs the post-bankruptcy credit score drop holds true for post-settlement drops: Higher credit scores tend to fall farther than lower credit scores.
However, the post-settlement drop is both less jarring and shorter-lived. In general, a program of debt settlement will cause your credit score to drop by about half as much as a declaration of bankruptcy. Since the post-settlement drop is typically smaller, it’s measurably easier to begin rebuilding your credit after debt settlement than after bankruptcy. Since your credit score won’t be depressed to such a tremendous degree, you’ll have more opportunities to procure the credit facilities that you need to begin rebuilding your financial life.

Does Debt Relief Affects Credit Score

There are plenty of additional reasons to choose debt settlement over bankruptcy. Whereas bankruptcy immediately becomes a matter of public record and remains open to discovery by your future employers and lenders, debt settlement is a discreet process.

The debt settlement process also tends to wrap up within two to four years and may successfully wipe away thousands of dollars in outstanding unsecured debts. By contrast, the unintended consequences of bankruptcy may linger for years. During that time, you may be unable to obtain a car loan, credit card or bank account.

Get debt relief help today if necessary.

Unless you’re willing to live with depressed credit for the better part of a decade, you should strongly consider enrolling in a program of debt settlement to help reduce your debts. You’ll be glad that you did.