Q: How would my credit be affected if I do a debt settlement?

-Elijah, Hattiesburg, Miss.

A: Let's start with the basics of this oft-asked question. When you attempt to arrange a debt settlement, you are asking your creditors to take less than you owe them. Typically, they will only do this if they are uncertain about your ability to pay what you actually owe. In their view, getting something is better than nothing. The companies that charge big bucks to settle your debts can further this uncertainty by collecting money from you and paying NOTHING to your creditors for several months. They may see the payment you make to them as their fee while you are thinking they're aggressively making progress on your debt. So, you must tread carefully there, and do your homework. If debt settlement is your answer -- and it is NOT a magic bullet -- then consider going straight to the financial institution you owe. I believe you can do for yourself what you pay a so-called expert to do for you.

There are downsides to debt settlement to be sure! And you hit the nail on the head in terms of this path negatively impacting your credit report and score. Ultimately, these debts will be noted as "settled-in-full" on your credit report, indicating that you settled the account for less than what you owed. All future lenders will see those notations and definitely consider that information as they decide on interest rates to charge you should they decide to lend you money at all. Another reason not to settle debt is you could be issued an IRS Form 1099c for the "forgiven" amount. Not only are you creating a negative entry on your credit report for up to seven years, but you may also have taxable income out of the deal. I call that a double whammy.

So, I would consider charting a different course. Contact a credit counselor through the National Foundation for Credit Counseling at www.nfcc.org. They will work with you to right your financial ship and, if needed, will help you implement a debt management plan (DMP). A DMP will allow you to make one payment each month to the counselor's agency and that payment will be distributed to your creditors (right away!). This approach will likely take longer than a settlement, but it will have less of an impact on your credit score. It will also demonstrate to future lenders that you willing to take personal responsibility for your debts! Good question and good luck.

June Lantz Walbert is a CERTIFIED FINANCIAL PLANNER practitioner with USAA Financial Planning Services. She is also a lieu­tenant colonel in the U.S. Army Reserve with 20 years of service. Walbert's basic branch is Air Defense Artillery. She writes a weekly advice column, " Ask June " on military.com. Follow June @AskJune_usaa.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP and CERTIFIED FINANCIAL PLANNER in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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