What is Debt Settlement?
A debt settlement is a process where a creditor and debtor mutually agree to settle the debt for an amount lower than the total due. Debt settlements occur when a debtor has the intent to repay a loan but not the means to do so. In this case banks may choose to settle with the debtor for a lower amount rather than trying to recover the whole amount.
What is a Debt Write Off?
A debt write off happens when the debtor defaults on the payments and the bank is unable to collect it back. Banks employ several collection strategies to get payments from defaulters to prevent a write-off. If all the collection efforts fail banks write off the loan from their books as a loss. Sometimes they can sell this debt to third parties who will try to recover what they can.
How does a Loan Settlement Impact Credit Score?
Debt settlement has a negative impact on the credit score. It will be reported in the CIBIL consumer report and will hurt the credit score of the borrower for a long time. It is very difficult to get a new loan approved for a period of at least 7 years.
How does a Write-off Impact Credit Score?
When a debtor defaults and the bank writes off a loan, the debtor is seen as having no intent to repay a loan. The lack of intent to repay is heavily penalized by the credit bureaus. A write off will be reported on the credit report and is hurts the credit score even more than a settlement. It is extremely difficult to get a loan with a charge off on the report.
If a debtor is unable to make payments to the bank, he/she should reach out to the bank and try to make a settlement for a smaller amount that they can manage. This will prevent a write-off and is slightly better. However, one should avoid both a settlement and write-off if they have the means to pay.
Settlement vs Write-off
Both settlement and write off have a negative impact on the credit score and are best avoided. However, if one cannot repay his/her loan, then choosing a settlement with the bank is better. In either case, there is an adverse record on the credit report and will have an impact on future loan approvals. A settlement will have a slightly lower impact than a write off as it shows the willingness to pay at least part of the debt.