Reader Question: Should I continue with debt settlement or just pay off my accounts?

Christina wrote in today with a tricky situation, she's between a rock and hard place when it comes to getting out of debt:

Currently, I am signed up in debt settlement, with consumer credit counseling. I still keep getting threats to be sued for the credit card bills.  When I get my income tax return should I just take the bills and pay them off to avoid totally ruining my credit history?

I am going to turn in my lease in a year and I don't want to be denied another lease/loan because of those debts. What should I do?

This is a bit of a quagmire. Usually, once you enter debt settlement, makes sense to stick with it to the end. A lot of the damage has already been done to your credit (debt settlement involves stopping your bill payment and that leads to a lot of damaging late records). You could still get a reduced settlement amount and the creditors may or may not be serious about suing (the larger the amount, the more likely they are to take action). 

It really depends if Christina feels that the counseling program is doing a good job negotiating on her behalf and her case will be resolved soon. Or if she feels that she's just wasting time.

If she does have the money to repay her debts, this can also be a good option. She may end up paying more toward her debts, but she'll stop new late payments from reporting to her credit records. If she does decide to pay, it is important to get the final agreement in writing from the creditors so they don't continue to try collecting on the accounts in the future.

Either way, her credit won't likely improve that much in the next year. Late payments over 90-days cause credit score damage for up to 7 years. It's only the 30 and 60-day late records that cause temporary harm. If she pays off her debts quickly and works really hard to rebuild healthy credit (paying her bills on time, maintaining a low debt-to-limit ratio, applying for credit in moderation), she could see some improvements before the lease turn-in next year.

In this case, it really comes down to time vs. money.  She can save time and start rebuilding earlier by paying the debts off now. Or she could save money by waiting for debt settlement to produce a reduced repayment amount. What would you do?

Emily Davidson – Credit.com credit expert and former TransUnion insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Comments

[Tbed07]

I am confused. I thought debt settlement was different from consumer credit counseling. Does consumer credit counseling offer debt settlement programs? I thought they just did debt management.

[Emily Davidson]

I think it is fairly common for credit counseling agencies to also offer debt settlement and more aggressive financial programs. It is different than the basic "debt counseling" program.