Happy Family Parents and Kids Smiling How Long Does a Settlement Stay on Your Credit

Summary: A settled debt stays on your credit report for seven years, but that doesn't mean you can't work to rebuild your credit in the meantime. Solo helps you resolve past-due debts so you can rebuild your credit.

You probably already know that settling debt can harm your credit. Still, if you have charged-off debt that you can't pay in full, settling may be your best option.

Before you decide what to do with a debt, you should know how it can affect your credit score. Learn the answers to questions like "How long does a settlement stay on your credit?"

Read our debt settlement guide to learn more about how to settle your debt and save thousands.

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Debt settlement means paying less than you owe

When you settle a debt, you pay less than the face value of the debt. In exchange, the original creditor or debt collector agrees not to pursue you for the remainder of the debt.

Many creditors and debt collectors are willing to settle debts because it means that they can at least get something from you. Filing a debt lawsuit costs money, and even if a creditor or collector gets a judgment against you, there's no guarantee that they'll recover what they're owed.

Before you offer to settle a debt, you should check to see whether you're dealing with an original creditor or a debt buyer. Original creditors tend to demand higher settlements (often 50% to 75% of the debt or more).

Debt buyers are a different story. These companies purchase charged-off debts for just pennies on the dollar, so even if they settle, they can still generate a respectable profit. It's not unusual for debt buyers to accept 40% to 60% of the debt or even less.

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You can settle a debt before you get sued

Many people think about settling debt only once they're facing a lawsuit. However, you can try to settle a debt before you get sued, too. Most creditors and debt collectors will be more than willing to work with you if you contact them early on.

You might also get a better deal. That's because the creditor or debt collector hasn't yet spent any money on legal representation.

If you don't have enough savings to offer a decent percentage of the debt in a lump sum, you should still reach out. The creditor or debt collector might allow you to set up a payment plan. Payment plans have a couple of advantages:

You can get rid of the debt over time with a payment that fits your budget.
Paying the debt in full won't damage your credit as much as settling it.

To see how negotiating a payment plan works in practice, let's consider an example.

Example: Tony owes a creditor $3,000. He thinks about settling it with a lump sum, but he only has a few hundred dollars in savings, which isn't enough to make a reasonable offer. Tony wants to take action on the debt before he gets sued, so he reaches out to the debt collector to ask about a payment plan. He explains that he wants to pay the debt in full, but it will take him some time to do so. The debt collector agrees to let him pay $250 per month for 12 months. Tony follows through on the agreement, and once he's done, the collector marks the debt as "paid in full" on his credit report.

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Settlements stay on your credit report for seven years

How long does a settlement stay on your credit? The timeline is the same as most negative items on your credit report: seven years (15 U.S. Code § 1679c). These are some common examples of negative items:

Late payments.
Collections.
Debt settlement.
Civil judgments.
Foreclosures.
Repossessions.

Bankruptcy is a little different. Chapter 13 bankruptcy follows the seven-year rule, but Chapter 7 bankruptcy will stay on your report for 10 years (15 U.S. Code § 1681c).

Seven years might sound like a long time to have something on your credit report. However, the impact of debt settlements and other negative marks will gradually decrease.

Settling your debt is worse for your credit than paying in full

When you have a debt go to collections, it appears on your credit report. Unfortunately, paying the debt in full won't remove it. However, you can minimize the collection's impact on your credit:

Paying the debt in full is best for your credit.
Settling the debt is worse than paying in full, but it's better than not paying at all.
Not paying the debt results in the most severe credit damage.

Whether you settle the debt, pay it in full or do nothing, the collection still stays on your credit report for seven years. Paying in full or settling, though, looks a lot better to lenders.

If you're tempted to ignore a debt collector's calls, don't do it

Dealing with debt collectors is stressful. If you want to just ignore collectors and hope they go away, we don't blame you! However, ignoring communications, especially ignoring lawsuit papers, is a very bad idea. If you fail to respond to a debt collector or creditor, here's what can happen next:

The collector will file a debt lawsuit against you.
Unless you file an Answer by your state's deadline, the collector will win by default.
Once they have a default judgment against you, they can use wage garnishment and other aggressive methods to collect the debt.
The court judgment will damage your credit further.

Resolving a debt before you get sued is a good idea. And when you're on the wrong end of a lawsuit, settling a debt is essential to your finances.

If you've been sued for debt, file your Answer with SoloSuit today.

Settling a debt doesn't mean having bad credit forever

You probably can't get a debt settlement removed from your account before the seven-year period is up. However, you can work on improving your credit score in the meantime. Here are four easy ways to rebuild your credit after debt settlement.

1. Make all payments on time

Payment history is the most important factor in determining your FICO score. If you pay your credit cards, auto loans and other bills on time, you should see your credit score grow.

2. Pay down debt

Paying down credit cards or loans with high balances will reduce your credit utilization and boost your score. Aim to use no more than 30% of your available credit. Using less than 10% is even better!

3. Become an authorized user

Do you have a friend or family member who has good credit? Consider asking to be added as an authorized user on one of their accounts. When you do this, the account owner's payment history appears on your credit report, too.

However, this method is not without risk. If the account holder stops making payments, your credit score will be impacted, too.

4. Limit new credit

Applying for too many accounts in a short period of time can damage your credit. When you're trying to rebuild your credit, only apply for new credit accounts you absolutely need.

This video offers some useful tips for negotiating a debt settlement.

Key takeaways: How long does a settlement stay on your credit?

Debt settlements generally stay on your credit report for seven years. Settling a debt is worse for your credit than paying it in full. However, if you can't afford to pay in full, it's a good compromise.

Before you offer to settle a debt, keep the following in mind:

Reaching out to settle before you're sued for debt should make things easier.
Debt buyers tend to accept lower settlements than original creditors do.
Even though debt settlement stays on your credit report for seven years, its impact lessens over time.
During those seven years, you can still take steps to improve your credit.
To build your credit, work on reducing credit card balances, make all payments on time and ask to become an authorized user on someone else's account.

End your debt with SoloSettle today!

FAQ

Will my credit score increase after settlement?

Not right away. Debt settlement can significantly lower your credit score, at least for a while. However, it's less damaging to your credit than just ignoring the debt.

Is it better to pay off a collection or settle?

Paying a collection in full is better for your credit. Having a debt go to collections causes credit damage, but this damage will stop when you pay it in full. However, if you're unable to do this, it's worth considering a settlement.

If a debt collector gets a judgment, how much of my wages can be garnished?

Federal law places limits on wage garnishment (15 U.S. Code § 1673). The most that can be taken from your wages is either (1) 25% of your weekly disposable income or (2) the amount of your wages above 30 times the federal minimum wage, whichever is less. Government benefits like Social Security are generally exempt from garnishment.

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How Long Does a Settlement Stay on Your Credit?