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Debt Settlement Overview

debt free - debt relief
HIGHLIGHTS
  • Debt Settlement is where you negotiate with creditors to lower the amount you owe.
  • Debt Settlement can significantly reduce your debt.
  • Not all debts can be settled.
  • Debt Settlement is only for consumers with financial hardship.

What Is Debt Settlement?

About Debt Settlement

Debt settlement can be a good solution to your debt problems. If you carry more than $10,000 in unsecured debt and struggle with or are unable to make your monthly payments, debt settlement is a solution you should examine. It can significantly reduce your debt, but it does have an impact on your credit rating and it is not an easy experience. Debt settlement offers a low monthly program payment, sizable debt savings, and short time to debt freedom, but there's no gain without some pain.

Quick tip  Contact one of Bills.com's pre-screened debt providers for a free, no-hassle debt relief quote.

What is Debt Settlement?

Debt settlement, also called debt negotiation or debt resolution, is a process where settlements are negotiated with your unsecured creditors,  where they agree to forgive a part of your balance, frequently saving you between 40% to 60% of what you owe (results vary widely, however). You then only have to pay the new, agreed-upon sum. In some cases, you will pay this settled balance over a structured period and you must make monthly payments. More frequently you pay off the reduced balance in a lump-sum payment.

How Do I Get a Debt Settlement?

You can negotiate directly with your creditors, or you can apply for debt settlement and hire a debt settlement service to negotiate for you. In most cases, professionals will have better luck negotiating a settlement than individuals. They know how much each creditor is willing to settle and what terms they’ll agree to. The best debt settlement providers settle a large volume of debt, so they have the have bulk and scale necessary to leverage their relationships with the creditors to benefit all of their clients. They also know which creditors won’t settle debts.

No Up-front Fees

Only work with a debt settlement firm that does not charge up-front fees. Any debt settlement firm that telemarkets its services is not allowed to charge up-front fees. Lawyers and debt settlement firms that meet with clients face-to-face can charge up-front fees, but it makes no financial sense to work with a firm that charges you in advance, when you can find reputable, experienced settlement firms that won't charge you a fee for any account they settle until after the settlement is finalized.

Debt Settlement Pros and Cons
  Pros Cons
Debt Settlement Significantly lowers monthly payment Credit rating impact
Lowest cost to get out debt, while avoiding bankruptcy Collection calls
Speeds up the time to debt freedom Creditors can pursue legal action
  Possible tax implications

What are the Benefits of Debt Settlement?

Reducing your total debt, speeding up the time it takes to become debt free, and reducing the size of your required monthly payments are the biggest benefits. If your debt is so large that you can’t pay it off and are facing bankruptcy, settling the debt is a much less harsh option. Although your credit will be dinged, it won’t be nearly as severely harmed as it would be with a bankruptcy. Typical settlement savings are in the range of 50% of what you owe, although your mix of creditors and the debt provider you choose could produce very different results. These dramatic savings are based on your current account balances. If you figure in how much you currently pay each month and total what you would pay until the debt is paid off, with all the interest you are charged, the savings from debt settlement are even larger.

What Are the Drawbacks?

The potential for having the amount you settle considered taxable income and the damage to your credit are the two main drawbacks to debt settlement. However, only the unpaid balance is taxable, and then only at your normal tax rate.

The forgiven balance is usually considered taxable income by the IRS, although if you meet the IRS' definition of insolvency, at the time of your debt settlement, you may not have any tax obligation for the forgiven debt . Seek advice from your tax adviser on Cancellation of Debt Income, and be sure to ask about IRS Form 982, the form that is used to excuse your requirement to declare the forgiven debt as income. In addition, the fact that you reached a settlement will be noted on your credit report. Even if you have to pay taxes on the settlement, it is far cheaper than having paid back the debt in full. Say, for example, you owe $10,000 and settle the debt for $5,000. You may have to pay taxes on the $5,000 you saved, if you are not eligible to use the Form 982, but that is far less than paying back the full $5,000.

Your credit will also be harmed because, during your debt settlement program, you are not making monthly minimum payments to your creditors. This results in delinquencies appearing on your credit report which lower your credit score. The experience can also be stressful, since you may get collections calls and could even be sued. You have to balance those concerns out against the significant savings.

What Kinds of Debt Can Be Settled?

Credit card debt settlement is the most common type of debt that is settled, although medical debts and other personal loans can also be settled. Mortgages, car loans, and other secured loans can’t be settled, because they are backed by collateral that the creditor can claim, if payments are not made as agreed. Federal student loans also can’t be settled due to Federal law. Any student loan that can't normally be included in a bankruptcy is not eligible for debt settlement. Loans made directly by a school may be eligible, so ask you debt consultant. If settlement is not an option for your student loans, contact your lenders to request consolidation, deferment, or forbearance.

What Are the Alternatives to Debt Settlement?

The best option is to pay off your debts in full. Debt consolidation loans are one way to do that. Debt consolidation loans can help reduce your interest rate or make your payments more manageable without reducing your balance or damaging your credit. You can consolidate with a personal loan or with a home equity loan. Using your home’s equity is a good option, if you own a home worth more than your mortgage balance, have strong credit, and your debt-to-income ratio meets the lender's requirements.

Credit counseling agencies also offer debt management plans. Debt management plans work to establish reduced interest rates on your accounts as well as possible forgiveness of late charges. You make a single monthly payment or a lump-sum payment to the credit counseling program, which then pays your creditors as agreed. Not every creditor is willing to reduce your interest rates. If your current rates are not the source of your problem, and your main problem is making your monthly payments, credit counseling likely will not be your best option. It does not lower your monthly payment significantly and is not going to offer relief if your current rates can't be reduced in the program.

Before you consider settling your debt, see if debt consolidation or management will work for you. When it comes to your credit, it’s always better to pay as much as you can.

Be sure to shop around and do your research and find out what debt solution is best for you, and if debt settlement is the right solution be sure to avoid any debt relief scams and find a reputable debt settlement provider that you can trust and that can do the job for you!

VIDEO: Debt Settlement - What is Debt Settlement?

Comments (41)


Edward O.
Delray Beach, FL  |  January 04, 2012
My friend, Bob, died in 2007, leaving a Will, but no tangible assets. There is an Estate but it is unknown when the Estate will ultimately be settled. It is also unknown as to the final tangible amount of money that will be distributed. Bob was not married, has a daughter over 18, did not own any property, and did not leave any "real" money for credit card debt, doctors bills, etc. The Estate would like to pay the credit card company a percentage of the balance once the funds become available. We wish to offer a percentage for in this way everyone would get paid. Can anyone provide me with a little guidance?
Bills.com
January 04, 2012
I urge you strongly to consult with a lawyer who has probate experience in the state of the decedent's residence. There are too many details missing in your message for me, or anyone else, to answer your questions accurately. The probate process accounts for the decedent's assets and liabilities, and classifies the creditors according to their relative importance. This classification determines which creditor is paid first, second, third, and so on. As I mentioned, a probate lawyer can assist the family in completing this process according to the decedent's state laws.

You indicated you reside in Florida. If Bob was a Florida resident, the Florida State Bar document Probate in Florida Pamphlet can give you a general overview of Florida's process. However, this brief document is no substitute for precise legal advice.
Theresa R.
San Francisco, CA  |  December 13, 2011
I have a delinquent debt on a credit card that has been purchased by a collection agency. That collection agency has contracted with a law firm to perform the actual debt collection. I've received a letter from that law firm offering a "reduction" on my account for a "total payment" of $X. They've asked that the payment be made payable to them, the law firm. They go on to say that if I take advantage of this settlement, I can avoid future collection activity on my account; they will "consider this account resolved." They make no mention in their letter of how they will report this account to any of the credit bureaus, and it seems they're being very careful not to say my account will be considered either paid or settled. The letter also mentions that no attorney with that firm has reviewed the circumstances of my account. I contacted the law firm today, and was told that if I made payment, they would provide me with a letter stating the account was paid that I could, on my own, send to the credit bureaus. The amount of the settlement is small, less than $400; is it worth my while to request verification of the debt? Furthermore, does the law firm's letter leave room for them to simply not report my account as paid, or worse, come back to demand the remainder of the full account balance due?
Bills.com
December 14, 2011
First, validate the debt. Second, if the law firm you mentioned can validate the debt, then negotiate a pay for delete. Keep in mind that absent a pay for delete, the fact that a debt is paid does not undo the damage caused by the delinquency. It is sort of like dropping a glass on the floor in a bar. Paying the bartender for the broken glass does not clean up the mess.
Melissa K.
November 30, 2011
Two topics - I have 2 foreclosures and 3 bad credit cards. The foreclosures were sold at auction and show as "Foreclosure Redeemed"; and my accountant proved that I was insolvent. Does that mean the foreclosures are noncollectable? Two credit cards are with Chase and are listed as "Purchased by another lender" and the other is with Citi and shows as charged off. Looks like National Credit Adjust may have bought the Chase debt but that entry on my credit report says the 2 accounts under NCA are placed for collection. Who do I contact to negotiate a settlement for the 3 credit cards, the original lender or the company that bought the debt? Should I try to settle for a percentage based on the original amount of the default or their inflated total with all the fees and interest? Your help in getting me to a place where I have peace of mind is greatly appreciated!
Bills.com
November 30, 2011
The first part of your question stumps me. You wrote, "...my accountant proved that I was insolvent." Proved to whom? Using what standard? I assume you are referring to Cancellation of Debt Income (CODI) found in IRS Form 982, where the IRS considers a taxpayer insolvent if the total of all of the person’s liabilities exceeded the fair-market value of all of that person’s assets. If this is what you are referring to, then just because you are insolvent for the purposes of canceling your federal debt income, does not mean creditors need to pay attention to that finding. In other words, you may be off the hook for federal taxes, but you may still have liability for state taxes or the deficiency balance.

When an original creditor sells a collection account to a collection agent, it assigns all of the rights it has to the account. The original creditor has no right to negotiate with the debtor or accept a payment on the debt. However, if the original creditor hires a collection agent as a contractor to collect the debt, then the original creditor is still in the driver's seat. The trick is finding if the collection agent is a contractor or bought the collection account.

The two Citi account listed as "Purchased by another lender" is a bit confusing because collection agents are not lenders. However, it is possible Citi sold these two accounts to another bank or credit card issuer. The third was almost certainly sold to NCA.

See the Bills.com resource Debt Settlement Advice to learn more about negotiating a settlement of a collection account with a collection agent.
Jen F.
Los Angeles, CA  |  October 17, 2011
I have a medical debt from that started from 3 years ago. The debt was transferred to a collection agency a year later, and then it was reported to the credit bureau last year. I'm just wondering if I can still speak to the doctor directly to try to settle the debt - or is it out of their hands since they transferred it to a collection agency? Also does the SOL start from the date of nonpayment before it was moved to a CA?
Bills.com
October 17, 2011
If the original creditor asked the collection agent to collect the debt, in other words, the collector is the original creditor's contractor, then the original creditor is still in the driver's seat. However, if the original creditor sold the collection account to the collection agent, then the original creditor has no interest in the account whatsoever. Call the original creditor to learn if your account is still on file. If the account was sold, it will tell you so, and you cannot negotiate with them.
John P.
Lakeland, FL  |  October 12, 2011
There is a settlement offered by Citibank but the debt collector stated that after the 12 months of payment and the agreed settlement dollars,Citibank reserves the right after 12 months to change the agreement. Please comment on the legality of "reserves the right."
Bills.com
October 14, 2011
I have two reactions:
  1. Great example of a contract author trying to have a cake and eat it too. Also a great example of a party trying to get away with something because they think they can. This clause is shameful.
  2. My guess is most courts would find this clause unconscionable, one-sided, and unreasonable. When one party to a contract is huge (like Citi, which is one of the five biggest banks in the US), and the other is small (a consumer) and the consumer cannot negotiate the contract, courts will consider agreements between the parties adhesion contracts. Courts look at contracts of adhesion with great suspicion, and are free to remove or modify egregious terms and conditions.

Try to negotiate the removal of that clause. Document your attempt to do so. If Citi tries to invoke this clause later, then take all of your documentation regarding this matter to a lawyer in your state who has experience in civil litigation or consumer law.

Michael S.
Perkasie Borough, PA  |  September 16, 2011
I have two older credit card accounts from HSBC that I owe. I have two different agencies collecting on them the. But First, I have heard that if the statue of limitations is over (In PA the limit for credit card accounts is four years since the last payment) the debt is now "uncollectable" if that is true, is it still possible to still make them remove derogatory remarks from your credit report? Or would I have to settle these accounts first? On the first account I received a settlement offer and if I need to accept the offer first, should I send them a letter first stating what I want before sending payment? I'm afraid if I call them they will tell me there is no time for exchanging letters because the settlement offer expires in 4 days and then have them "promise" to remove remarks and tell the 3 agencies that I am paid or paid as agreed and in reality they won't! So, I'm leaning toward sending a letter that I'm willing to pay but here's what I want and have them sign it and mail back to me before sending payment etc. What do you recommend? On the second HSBC account being handled by a lawyer they have filed a for a judgment and there is now a public record on my credit report. So, I have Lexington Law trying to have them verify the debt and I did that also to stall them as I was told no further action can be taken against me until they verify everything. However, I don't think Lexington can actually have that removed or cancelled on my behalf. I just didn't want a judgment hitting my bank account for $1300 right now especially when the original debt was approx 300.00 I need to know how to settle this account and get rid of that public record as it will likely prevent me from getting a new job or renting a new place in the near future. (I am currently unemployed) Please advise me in these two situations!!! Thank You so Much! -Mike S.
Bills.com
September 16, 2011
First, a federal law called the Fair Credit Reporting Act controls the behavior of the consumer credit reporting agencies, and what can appear on a credit report. Statutes of limitation are state law, and have nothing to do with what appears on a credit report. Consumers often mix the two, but credit reports and statutes of limitations are completely separate and independent of each other.

Second, the fact that a debt passed a state's statute of limitations does not mean the debt is uncollectable, unless you reside in Wisconsin. The passage of the statute of limitations gives the consumer an affirmative defense should the creditor file a lawsuit against the consumer to collect the debt. If the consumer raises the statute of limitations defense in a timely manner, the court will dismiss the case.

Third, you certainly have the option to negotiate a settlement to your debt via the postal service. But for the sake of expediency, you may wish to negotiate via e-mail, and then ask the collection agent to print and sign the final agreement, which it can fax or express-mail to you.

Fourth, it is never too late to negotiate, even if the creditor is holding a judgment against you.

Finally, see the Bills.com resource How to Obtain a Pay for Delete to learn more about this option.
Eddie T.
Mableton, GA  |  September 12, 2011
I have a medical debt from over seven years ago that was transferred to a collection agency. The CA has recently reported to the credit bureau. Can they do this? My understanding is that they can only report a debt for seven years. I this against the law?
Bills.com
September 13, 2011
Under federal law, a derogatory like the one you described can appear on a consumer's credit report for seven years. Dispute the debt with the consumer credit reporting agencies.
Anna K.
Round Rock, TX  |  September 11, 2011
I was stationed Colorado.. I was listed as a TX resident in the Army. Bought a car in CO in 2005, moved to TX, ex got the car in divorce 2006, she let it get repo in Colorado. Not sure if there is a "choice of Law" in the contract...Which SOL do I go with.. CO or TX? One CRA shows it to "fall off" Dec 2012. Want to make a settlement with the collection agency ( the 3rd one it was passed to) but don't want to "stir up" things until I'm sure I wont get sued. Would like to buy a house in two years, so I want it taken care of.
Bills.com
September 12, 2011
You answered your own question: Review the contract you signed to learn if it contains a choice of laws clause. If so, there is your answer. If there is no choice of laws clause, then the analysis of your question is complex, and beyond the scope of my one-paragraph reply to your comment. See the Bills.com resource Statute of Limitations for discussion on how to analyze statute of limitations questions.

Your state's statute of limitations (whichever may apply), has nothing to do with the federal rules relating to how long a derogatory may appear on your credit report.
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