What Happens to a Credit Report After a Debt Settlement?

It is difficult to repair a bad credit report without clearing up old bills, according to the Bills.com financial website. Credit card companies and other creditors may give up on collecting their money, but they don't erase the records from the account holder's credit reports. The negative information sticks around for years unless the debt is settled and removal is part of the bargaining process for the settlement amount.

Definition

Credit reports are financial records compiled by three large credit bureaus -- Experian, Equifax and TransUnion -- according to the Federal Reserve Bank of San Francisco. Each of these firms gathers its own records, and they all sell the information to lenders and others who make financial and employment decisions about consumers. Unpaid debts show up on these reports and get in the way of getting insurance, credit and jobs.

Time Frame

Virtually all unpaid debts, like outstanding loans and credit card balances, appear on credit reports for seven years, according to the FTC. Everyone who orders the reports within that time frame sees those negative marks.

Solution

Some consumers settle old debts to improve their credit reports, which may involve paying the bills in full or settling for a smaller amount. Bills.com explains that creditors are often willing to negotiate the payoff balance on old accounts, which changes the credit report entry to a zero balance and a "settled" or "paid" status.

Warning

Settling a debt does not turn a negative credit report entry into a positive one. Smart consumers make total removal of the account or a change in status to "paid as agreed" a part of their settlement negotiations. The Financial Web finance information site explains that creditors can report whatever they wish and are often willing to negotiate this point to get their money. All agreements should be put into writing before the debt is paid so the creditor is obligated to follow through with removal from credit reports. Consumers can ensure this has happened by ordering no-cost report copies through annualcreditreport.com, according to the FTC.

Considerations

Old accounts are often charged off and sold to collection agencies at a discount after six months of skipped payments. Collectors can remove their credit report entries, but they cannot wipe away the original creditor's notation. The Debt Steps debt information website recommends making removal of both records a condition of settling a credit agency debt. Collectors will not always do this, but they often try if they know it means they will get their money.

References

• Federal Reserve Bank of San Francisco: Your Credit Report, What it Says About You
• Federal Trade Commission: How to Dispute Credit Report Errors
• Financial Web: Negotiating Debt Settlement, Reasons to Do it Yourself
• Federal Trade Commission: Your Access to Free Credit Reports
• Debt Steps: Credit Card Debt Negotiation and Your Credit Report
• Bills.com: What is the Fastest Way to Get a Report of Collection and Late Payments Off a Credit Report?

Resources

• Annual Credit Report: Free Credit Report