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Life After Debt Settlement
Debt settlement provides both short and long-term relief for a consumer. How one plans for life after debt settlement, however, is critical.
The Initial Relief of Debt Settlement
Once a debt settlement has been arranged with creditors, there is, of course, an initial sense of great relief. Now, the total debt amount has been reduced, and the debtor is on a manageable payment plan, which will eliminate the debt more quickly. There are a number of considerations which must be considered, however, as one plans for life after debt settlement.
Settlement will definitely affect a credit score. Each creditor will report the settlement to the three major credit bureaus, and a score will initially drop, the amount dependent upon the number of creditors involved in the settlement. The more settlements, the more the score drops. It is important to remember that rebuilding an excellent credit score will involve making all payments on time as agreed and to continue to make other debt payments on time. Late payments after settlements will kill a credit score.
A consumer must identify the spending behaviors, which resulted in the overwhelming debt in the first place. Once these behaviors are identified, specific plans must be made to avoid those behaviors in the future. For example, if shopping trips result in impulsive purchases, no one in the family shops without a list, and nothing not on the list is purchased. If holiday shopping is out of control, it will be important to save all year for that shopping or inform gift recipients that holiday giving will be much reduced.
A household budget is an absolute must. Consumers must put in writing all of the income and all of the debt on a monthly basis. The necessities (mortgage or rent, car payments, insurance, utilities, credit card and other revolving debt) must be subtracted from the income first. Determining a reasonable amount for normal weekly expenses (groceries, gas, etc) is subtracted next. The remaining money should be divided between savings and unnecessary items. Following this budget faithfully will mean that there is cash available when emergencies arise.
Watch the “Bad” Debt
Bad debt is that which is assumed without purchasing items of permanent value. A home, for example, is of permanent value, and the mortgage debt is considered to be “good” debt. Credit card debt for purchases which have a “shelf life” and cannot even be remembered when the debt is still being paid, is “bad” debt. Anyone who has experienced the process of debt settlement knows that life after debt settlement means great self-discipline in not spending frivolously.