Debt Settlement Explained

What is Debt Settlement?

Debt settlement is the process of negotiating with creditors (usually credit card issuers) to reduce the amount you owe in exchange for a one-time lump sum payment to settle the account. A successful settlement occurs when the creditor agrees to “forgive” a portion of the account balance, and the lump sum payment is made by the debtor.

Typically, only unsecured debts can be settled. Unsecured debts include medical bills and credit card debt; but not public student loans, or secured debt (i.e. auto loans or mortgages). For the debtor, the settlement makes obvious sense: they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering the amount of debt they have to pay – sometimes by 50% or more. For the creditor, they regain trust that the borrower intends to pay back at least some of the debt and reduce their risk of the debtor filing for bankruptcy (in which case, the creditor risks losing all moneys owed).

Debt settlement is distinctly different than negotiating with a collection agency or junk debt buyer. Many collection agencies (or junk debt buyers) will agree to take less of the owed amount than the original creditor, because the junk debt buyer has purchased the debt for a fraction of the original balance from the original lender.