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How does debt settlement effect my credit?

Step 1 - Is the account appearing on your credit report? For a debt to effect credit scores, it must be appearing on the borrowers credit report. If the item is not appearing on the credit report, then it would be inconsequential to the credit score whether the debt is settled, paid or unpaid.

If you have confirmed that the account in question is appearing on your report, then this is what you could expect as a result of resolving your debt:

  1. If you pay the debt in full, the credit report will likely be updated to reflect a notation such as "PAID" or "PAID IN FULL". The balance on the debt should be updated to reflect a $0 balance, or sometimes, the balance will stop reporting alltogether.
  2. If you pay a reduced amount in settlement of the debt, the credit report may reflect a notation such as "PAID IN SETTLEMENT FOR LESS THEN THE FULL BALANCE".

Impact on Credit Score

Generally, paying a debt in full will have less of an adverse effect to credit then paying a debt in a settlement. It is impossible to say exactly how your credit score would be effected as the FICO credit scoring model is proprietary, and each persons score would be effected differently in part because each person is starting with a different baseline report. Regardless of how a debt is resolved, the adverse notation is not a "life sentence" to having bad credit. As the notation gets older, it's impact on the score will gradually diminish. If the borrower is able to establish positive lines of credit, that information may also help reduce the impact of the older adverse settlement notations.

Credit Reporting Timelines for a Settled Debt

In New York, a collection account that has been paid will report for a maximum of 5 years. This only applied to notations made by the actual debt collectors, it does not apply to the credit reporting by the original creditor. The creditor's trade line is subject to a 7 year maximum for the adverse information.

Is your settlement reporting wrong on your credit report?

It is not unusual for credit reports to have some errors. Sometimes it's the fault of the credit bureaus, and sometimes it's due to the debt collection agency failing to report the settlement. Fixing these issues may require submitting a dispute to the credit bureau to inform them of the settlement and to let them know that your credit report needs to be updated. The method that we find most effective is to write a written dispute letter and send it in by mail. Sometimes it can help to submit a copy of the settlement completion letter. If you are having difficulty in fixing your credit, our attorneys may be able to assist you.

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