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If I Settle with a Collection Agency, Will It Hurt My Credit?

Sarah Edwards | February 23, 2023

Sarah Edwards
Legal Expert
Sarah Edwards, BS

Sarah Edwards is a professional researcher and writer specializing in legal content. An Emerson College alumna, she holds a Bachelor of Science in Communication from the prestigious Boston institution.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Debt settlement is a good way to get back on track financially.

Summary: Debt settlement can hurt your credit score, but it won’t hurt as much as not paying off your debt. If you find yourself being sued for debt and want to settle it once and for all, use SoloSettle to make an offer and reach a debt settlement quickly and easily.

Your credit score is one of the first things that financial institutions look at when considering you for a loan. It can influence your eligibility for a mortgage or even your ability to rent an apartment. Paying your bills on time is one of the most important ways to preserve your credit.

But what if you have outstanding debt? If you settle with a collection agency, will that hurt your credit? A debt settlement can lower your credit score, but it’s still your best option. Here’s why.

Can debt hurt my credit?

Debt can hurt your credit. Consumer credit scores range from 300 to 900, with higher scores reflecting better credit. The Consumer Financial Protection Bureau reports that there have been over 60 scoring methods used since 2011, so your final score isn’t based on any one common formula.

However, your score will generally be influenced by the following:

  • Payment history (35%)
  • Amount of debt (30%)
  • Credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

Notice that your debt is a major factor in determining your credit score — accounting for roughly one-third of your final score. Outstanding debt can lower your score, though the degree varies depending on how much debt you have and how long you have it.

What is debt settlement?

Debt settlement means that you agree to pay a portion of your outstanding debt, and in return, your creditor forgives the rest. You can settle your debt with your creditor directly, though many times your creditor will sell your debt to a collection agency that will then pursue you to reclaim the debt.

Many companies and collection agencies are willing to accept a lower debt settlement since it means they’ll get paid right away and eliminate the time and money associated with the legal process. If you have outstanding debt, a settlement is usually the fastest, most cost-effective way to move on with your life.

Will debt settlement hurt my credit?

Ideally, credit bureaus want to see the words “paid in full” next to your outstanding debts. But this won’t be an option if you settle. Settling your debt will hurt your credit and result in a lower score than if you’d paid your debt in its entirety.

That being said, settling a debt won’t hurt your credit score as much as not paying it off at all. For this reason, settling your debt can help you get back on track financially and work towards building your credit in the future.

How much will debt settlement hurt my credit?

The National Foundation for Credit Counseling reports that debt settlement practices can lower your credit score by 100 points or more and tarnish your credit history for up to seven years.

However, the exact impact can vary from person to person, and it can also depend on the amount of debt that you settle. For instance, a person with a credit score of 800 may be impacted more dramatically than someone with a lower score.

If you already have diminished credit because of other debts or late payments, settling your debt won’t be as dramatic as if your score were higher. It’s also better than not paying at all.

Why debt settlement is still your best option

Even though debt settlement can lower your credit score, it remains your best option. Settling your debt lets you get rid of it as quickly as possible. Once your debt is gone, you can work on rebuilding your credit. Ignoring your debt will only hurt your credit history.

If someone sues you for debt, it’s crucial to respond with an Answer immediately to avoid a default judgment in your creditor’s favor.

How to settle debt

You can settle debt in just a few easy steps.

  1. File an Answer.
  2. Make a settlement offer.
  3. Get the final agreement in writing.

Below, we break down each of these steps in greater detail. You can also watch this video to learn how to settle a debt:

1. File an Answer

Are you being sued for debt? If so, you must respond with a written Answer before your state’s deadline. Otherwise, the court could order a default judgment against you, which makes you responsible for the full amount.

File an Answer even if you’ve reached an agreement with your creditor or collection agency. This prevents them from going around you and pursuing a default judgment anyway.

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2. Make a settlement offer

Once you’ve filed an Answer into your case, you’re ready to start negotiating a settlement.

You need to determine how much you can afford to pay off and how much the collector will be likely to accept. Most debt collectors are willing to settle for a percentage of your original debt amount.

The average debt settlement reached is 50% when working with a debt settlement company, but you can settle your own debt with SoloSettle and avoid working with settlement companies.

All of that said, a 50% settlement is not easy to get. An 80% settlement is easy in most cases, as most creditors and debt collectors are willing to drop to that amount. Usually, we see debts settle for somewhere within that range. Around 60% is pretty common.

Let’s explore an example.

Example: Lauren is being sued by a debt collector for $6,000. She has enough money on hand to pay off $4,500, which is 75% of the debt. After doing some research, she assumes that the debt collector will be willing to settle for as little as 60%, or $3,600. She uses SoloSettle to send an offer that is somewhere in the middle at $4,000. After a few rounds of negotiations, Lauren reaches a debt settlement of $4,200. She saves $1,800 and feels like she can finally regain her financial footing.

Don’t worry if your initial offer is rejected. This just means that you can continue with negotiations. The creditor or debt collector may send a counteroffer, so be prepared with your next step when you send your first offer.

SoloSettle’s software takes care of the negotiation process for you.

3. Get the final agreement in writing

Don’t send your settlement payment until you have an agreement in writing. Otherwise, your creditor might attempt to secure a default judgment, forcing you to pay more money.

Once you’re ready to pay, you can protect your sensitive financial information by using SoloSettle to settle. This keeps all of your banking details out of the hands of unscrupulous collection agents.

Is debt settlement right for me?

The bad news is that settling your debt will hurt your credit, and there’s nothing you can do to avoid that. But the good news is that settling your debt is still better than carrying around a massive debt that you can’t repay.

Settling your debt will hurt your credit less than if you ignore your debt, and it can also put you back on track to rebuilding your credit.

Use SoloSettle to settle your own debt without having to work with a debt settlement company. Check out this review from a real SoloSettle customer who was able to settle his debt and save hundreds:

“I'm very thankful for SoloSettle.. Having a third party negotiate the settlement was instrumental in resolving this case and saved me from two giant headaches: 1) I didn't have to deal with the plaintiff's lawyer and 2) I didn't have to go to court. I also love that the payment was processed through SoloSettle. I was nervous about sharing my personal financial data with the other side, but SoloSettle protected that for me. I hope I never get sued again, but if I do, I would use SoloSettle again in a heartbeat.

SoloSettle really saved me a ton of time and heartburn and kept me from having to be my own lawyer in court.”

What is SoloSuit?

SoloSuit makes it easy to fight debt collectors.

You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate

>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)

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