cleaning your credit reports before you apply for a consolidation loan makes a lot of sense. If you prepare in advance, you will avoid both a loan turndown, and unnecessary inquiries showing up on your credit reports.




For most people, debt settlement should only be considered as a last resort to filing bankruptcy because of the effects that participating in a debt settlement program has on your credit rating. Understanding how debt settlement works is key to understanding the results a debt settlement program can produce. 








The goal of debt settlement is to help you regain control over your finances. This is done be renegotiating your existing debts to a lower value. As a result of successful debt settlement, you will end up paying pennies on the dollar for your debts. For people who are stuck with not having enough money to pay their current bills and find themselves getting further and further behind on their payments, debt settlement can help reverse the trend and get you back on the right path. 

Debt settlement works because your creditors would rather receive a partial payment from you than have you declare bankruptcy and force them to deal with the legal system. Debt settlement companies use this to your favor. 


When you begin working with a debt settlement company, you will agree to pay a set monthly fee that the debt settlement company will then use to pay your bills. While using the debt settlement services, you will no longer make payments to your individual creditors because the debt settlement company will take over your bill paying responsibilities. 


The debt settlement company will then begin the process of "aging" your debts. Put simply, they will stop paying your creditors so they begin to fear that they will not be able to collect them money owed to them. This primes creditors and collections agencies for later negotiation efforts because, as mentioned above, your creditors would rather receive a partial payment than not get paid at all.

After your debts have been aged, the debt settlement company will begin contacting your individual creditors to negotiate lower payments. When they are able to successfully negotiate a new payment plan, they will use the money from your monthly payments to pay off the debt. 

While debt settlement can help you pay off your debts, you can see how it impacts your credit reports and your credit rating. When your accounts are being aged, your creditors are not receiving payments and may report this to the credit bureaus. As a result of going through a debt settlement program, your credit report will be hit with multiple late payments, collections accounts, and charge offs. You will be able to avoid declaring bankruptcy but your credit score will be severely damaged in the process. 

A bankruptcy can stay on your credit reports for up to 10 years—three years more than the 7 years that damage left behind by debt settlement will last. When the only alternative is bankruptcy, debt settlement can be a good option.