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By Sean A. Kelly

People, in general, hate debts. The idea of having to set aside an amount of money every month to make sure that the debts are paid may seem ridiculous to many people as it might only seem more logical to put that money into an account where it may grow, for example, in mutual funds. However, the reality may almost always be a lot different than the ideal situation. At some point, you may even find yourself hitting a plateau where you may no longer be able to pay your debts off. Given the factor of economic recession with many people losing their jobs at a time when job opportunities are scarce, you may find yourself contemplating signing up with a debt reduction program. You know that if things remained as they were you probably would not need to but circumstances do change and you may need to do all you can to adapt to that change.

After a few days of research and background checks, you may probably decide upon a debt reduction program that you believe may be able to help you negotiate with your creditors to reduce the amount you owe. Probably you have already prepared all the necessary paperwork to show that you have been a good paymaster all your life and that you need your creditors to reduce the amount of your debt because you are currently unemployed due to the downsizing of the firm where you worked. With such detailed preparation and good track record, it probably would not be too difficult to convince your creditors to reduce your debts. However, you may be surprised to find out that your creditors would not automatically reduce your debts simply because you are suddenly unemployed.

Generally, creditors rarely allow a reduction of debts or even debt settlement unless you are already more than just a few months late in making your due payments. So, in order to be successful in negotiating for a reduction of debts, you may have to stop paying your creditors for a few months. Of course, this would not be a problem since you are already unemployed and cannot afford to make the due payments anymore. The problem may probably lie on the effect of delinquent payments on your credit score and rating. You probably already know that any late payment may cause a slight dent on your credit report but to actually purposely miss several payments may cause more than just a dent. Before your creditors reduce your debts you may probably have to watch your credit score reduce first.

The domino effect then continues as your late payments may remain on your credit report for up to seven years. On top of that, even if your appointed debt negotiation company is actually successful in having your debts settled or reduced, your delinquent payments may not even be removed from your credit report. So you may suddenly find it difficult to apply for a new loan or to make big purchases unless you have any asset to put as collateral. There may be instances where creditors or sellers may approve your purchase or loans by looking into your credit history back to before you were unemployed. Even so, they may impose a higher interest rate as you may be considered as a high risk applicant. So if you really wish to go ahead with a reduction or settlement of your debts, you may want to have a back up plan on how to quickly improve your credit score so that you may not have to stay a high risk applicant more than to the extent that you need to.

Generally, if you have always been current on your debts and wish to maintain your good credit score you may want to opt for a different method than debt reduction or settlement. Of course, it may be advisable that you sign up with a consumer credit counseling program so that you may develop a debt management plan with your creditors without reducing or settling your overall debts. At least you may still be able to pay off your debts in full so that your credit report may not be affected.

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