How long does debt settlement stay on your credit report?

Debt settlement stays on your credit report for seven years. The starting point for this seven-year period varies depending on the account’s payment history. For accounts with a history of on-time payments, the seven-year period begins on the date of settlement. For accounts with a history of delinquent payments, the seven years start on the date the account became delinquent and never current again. Since debt settlement generally involves late payments, this starting point is more common.

The length of time debt settlement stays on your credit report also relates to how it impacts your credit score. During the debt settlement process, your credit score will drop due to missed payments (if applicable) and due to the reflection of the settlement on your credit report.

It’s impossible to predict an exact credit score fluctuation due to debt settlement without looking at an individual’s credit history. That being said, people who pursue debt settlement can expect a drop in credit score of at least 65 points, and sometimes over 100 points.

Debt Settlement on Your Credit Report:

To illustrate debt settlement’s effect on your credit report and credit score, let’s look at two different scenarios. In both cases, let’s assume that you have $10,000 in credit card debt, you’ve consistently made minimum payments on the account in the past, but you just lost your job and consequently cannot make the payments anymore.

• Scenario 1: You reach out to your creditor to explain the situation and ask for a settlement. Your creditor accepts a settlement on April 15, 2020. In this case, debt settlement will stay on your credit report until April 15, 2027.
• Scenario 2: You do not reach out to your creditor and simply stop making payments. Your first due date without payment passes. Your account is reflected as delinquent on April 30, 2020. In this case, debt settlement will stay on your credit report until April 30, 2027.

There are a couple of methods you can use to attempt to avoid the seven-year period, but there is no guarantee of acceptance.

Pay for Delete: It is possible that if you offer to either pay your balance in full or pay a higher portion of your debt, your creditor will remove the debt settlement from your credit history. It sounds like a great option, but it’s a legal gray area.

The Fair Credit Reporting Act requires creditors and debt collectors to report consumer information truthfully. In debt settlement cases, you incurred the debt, so removing it from your credit report doesn’t provide an accurate picture of your credit. A collection agency that offers to do this should be viewed with suspicion.

Furthermore, it’s possible that if you paid to have a settlement removed from your credit report, it could reappear. At that point, you would have no legal recourse since the reporting would be accurate. Generally, this option should be avoided.

Re-Aging: Delinquent debt can still be reported as late, even if you make monthly payments on it. By re-aging your account, a creditor can make the debt current, which will benefit your credit standing. You can request this during negotiations.

Bottom Line

Debt settlement, like other negative items, will stay on your credit report for seven years. There are a couple of alternatives to get around this reporting period, but these should be pursued with caution. You will be better off practicing good fiscal habits to boost your credit score organically, rather than wandering into a legal gray area that may or may not work out.