Credit Advice

Impact of not paying debts for 90 days to enter debt settlement plan

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Credit Advice

Impact of not paying debts for 90 days to enter debt settlement plan

Dear Experian,

I am about to join a debt settlement company. In order for them to negotiate the best deal with my creditors I must refrain from paying my bills for more than 90 days. If I have to wait until my debt is in collections, will that also affect my credit scores negatively? They tell me that after I pay off my settled debt, my score would go back up to where it originated. They also say I could write to the credit bureau to get the accounts taken off of my report. Is all of this true?

- TND

Dear TND,

What do you think? I suspect deep down you know the answers to your questions. If you have any doubt, the answer is that none if it is true.

The debt consolidation company wants you to miss payments so that the creditors might decide you aren’t going to pay at all and, thus, be willing to accept a lesser amount than you actually owe or possibly give you special interest rates. If you have been reading Ask Max, you know that any missed payments will be reported in your credit history for up to seven years. 

Subsequently catching up on your accounts with a consolidation loan won’t erase the facts of your payment history. In addition, if the creditors do agree to accept a lower amount, your accounts then will be reported as settled, and that status is a major negative similar to a collection account.

I can’t imagine how your credit scores could benefit from such a scenario.

A debt consolidation company makes money by convincing you to pay them instead of your creditors. If you really are at the point of missing payments due to a financial crisis and you aren’t just looking for a way to pay less than you agreed to pay, seek help from a credit counseling company that can put you in a debt management plan. 

They can negotiate better terms without harming your credit history. The legitimate ones are for free or charge a minimal fee, they will help you work on your budget to get your finances in control, and they will NEVER advise you to miss payments.

They may be able to identify steps you can take to repay your debts without entering a debt management or debt settlement plan.

If you do need to enter a debt management plan, they should be able to negotiate settlements for the accounts that are in the worst shape. That may free up funds for you to continue to pay on other debts and perhaps even pay them off more quickly.

If such a plan is necessary, a quality credit counseling organization will tell you to continue making your payments on time until the settlement program is in place and it begins making payments to the lenders.

You should immediately go elsewhere if an organization tells you to stop paying your debts. That is the worst thing you can do.

Thanks for asking.

- The "Ask Experian" team

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