Question about debt settlement and FICO

[Anonymous]

I have a lot of credit card debt (~60K) spread across several accounts (4). All these accounts are closed. I have also recently paid off 4 smaller accounts which are also closed. Because of my high debt to income ratio, I can't refinance the house at a favorable enough rate to make it worth doing.

We are about to sell a condo; the proceeds will enable me to pay off the entire balance due on these cards. Once my scores come back up, we are going to refinance the mortgage on our principal residence.

I've been talking to someone about entering a debt settlement program. They would negotiate settlements for, say, 45 cents on the dollar (including their fees), so I would only owe  27K instead of 60K. The difference would go into the kids' college funds. We would still pay off the entire balances once we have the proceeds from the condo.

So one scenario is pay off the entire 60K, wait for FICO to come back up, then refinance.

The other scenario is settle the debts, pay them off in full for only $27K, wait for FICO to come back up, then refinance.

Besides the high debt to income ratio and the fact that I am currently in hardship programs (temporarily reduced interest rates and minimum payments) on three of the cards, there are no significant negatives on my credit report. An occasional late payment -- maybe 2 or 3 total lates in the last 7 years.

So the question is: how long would it take for my scores to come up to the point where I could refinance. Before I entered the hardship programs, my scores were in the mid to high 600s. 

[RobertEG]

If you settle for less than the total debt, it will still show in your CR and FICO scoring as a setlement, which is as bad as not paying at all.

If you can pay it in full, ditch the debt settlement company, and simply offer a pay for delete to the creditor.

[Anonymous]

so what exactly is a pay for delete? who at the creditor do I contact to offer this?

[Jazzzy]

A "pay for delete" is when you offer a creditor payment in full (or perhaps a settlement amount) in order to remove the entire account from your reports or to remove the lates from your reports. Most times, this is done with accounts that have been charged off or if the account has been turned over to a collection agency. It doesn't sound as if your accounts have reached that level.

I would not recommend that you totally kill your credit by entering into debt settlement...especially if you will have the means to pay these bills.

Have you lived through having rotten credit before? It's difficult to get a car loan...unless you want to pay very high interest. Hopefully you won't have to move during that time, because you won't be able to buy another house, and you might have difficulty renting if they check your credit. Hopefully you won't have to change jobs. Many employers run credit reports these days. Your credit cards are already closed down. Hopefully you won't have to rent a car. Do you really want to live like that for 7 years if you don't have to?

I know we're supposed to be kind and supportive here...and I really try to live by that. But, I certainly can't see someone actually putting themselves in the rotten credit hole on purpose. Boggles my mind.

Message Edited by LynetteM on 01-14-2010 06:17 AM

[AndySoCal]

Here is a link to an article you might find useful in making a decison

http://www.creditcards.com/credit-card-news/debt-settlement-choose-credit-score-1265.php

[Anonymous]

The article states that if you already have 90+ day lates debt settlement will not make your credit scores much worse. That's probably true. However, adding debt settlement on top of everything else will make it even harder to bring those scores back up. Baddies = CO's, BK's, judgments, serious lates and settled accounts are murder.

It's a real bad idea.

[AndySoCal]

If I understand the original post the accounts referred to have not reached the bad stage.  I think settling the accounts would lower scores in a serious way.

[Anonymous]

My post was a response to the article and not the OP's question. The article understates the damage done by debt settlement. In all circumstances debt settle will cause further CBR damage and make it more difficult to overcome any preexisting damage. Debt settlement is a really bad idea.