Understanding the Long-Term Effects of Debt Settlement on Your Credit

Going through the debt settlement process can be one way to eliminate your debt problems. However, it will leave some lasting negative effects. Here are some of the long-term impacts of debt settlement. 

Damaged Credit History

The longest lasting impact from a debt settlement comes in the form of negative credit consequences. When you go through a debt settlement, most of the time, your credit file will be negatively impacted. Your credit reports will list the accounts as "settled" instead of "paid in full." 

While you may be thinking only about eliminating your debt, the record of debt settlement will cause you other financial problems. A debt settlement will typically stay on your credit report for 7 years. Trying to buy a house, a car, or anything else on credit during this time will be difficult. Therefore you may have to live on an all-cash basis during that period. You can recover from this damage to your credit, but it will take some time and work on your part. 

Tax Implications

While the tax implications are not as long-term as the credit problems, they could affect you several months down the road. When you settle a debt, you will be responsible for paying taxes on the amount of money that was canceled. The company will send you a 1099-C at the end of the year and report the amount to the IRS.