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How (and When) Debt Settlement Works



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The convenience of credit cards makes falling into debt too easy. Getting out is the tough part. There is one way to pay back what you without significant damage to your credit: debt settlement.

If you reach a point where your debt-to-income ratio is so high that you can’t pay back everything you owe in a reasonable amount of time (if ever), or if your accounts are too far gone and you default on your debt, you’ll need to look for other solutions.

Bankruptcy should be a last resort, especially if you have assets to protect. The bankruptcy process can also cost thousands of dollars in filing and attorney fees.

Making a settlement offer to your creditors has major advantages over bankruptcy – for the right candidates:

  • You may save money
  • Damage to your credit
  • And a whole lot of time and frustration

Find out what debt settlement is, how it works, and when it can be the lifeline out of credit card debt.

What is debt settlement?

Debt settlement is where you work with a creditor to pay less than the full amount owed.

The idea is that at a point of severe default, a creditor or collector may be willing to accept at least a partial payment to recoup some of their losses – even if they can’t get back everything.

Video Transcript

What is Debt Settlement?

Debt settlement. Debt relief. Debt resolution. They’re different names for the same thing: You pay back less than you owe. Sound too good to be true? Not really. Debt settlement is one step short of bankruptcy, and your creditors don’t want you doing THAT. They might end up getting nothing. And YOU don’t want to declare bankruptcy, either. Here’s something most folks don’t know: bankruptcy isn’t free. You have to hire a lawyer and go to court, so it can cost thousands of dollars. That’s right, you have to pay to officially go broke. Debt settlement comes with a fee, but it pales next to how much you save – which can be half of what you owe. Now that you know what debt settlement does, learn how to take advantage of it at

Although your credit will take a temporary hit, this is a legitimate and effective option for debt relief.

Like in most industries, debt settlement scams do exist, so you need to make sure you’re taking a real path to settling your debts instead of taking on more problems.

Fact: Be careful! The FTC ranks debt settlement scams as one of the most common consumer fraud tactics. When working with a debt settlement company, they should not ask for any upfront fees.

Find a legitimate debt settlement company

Debt settlement can take a few different paths.

The first choice to make is whether you want to attempt settlement on your own or if you want to work with a company. There are distinct advantages to professional help, although you have to be extremely careful when you choose who to work with.

A reputable debt settlement company can provide the help you need:

  • They have established relationships with creditors.
  • They may be able to include your settlement offer with those of other customers; creditors can be more likely to accept collective offers.
  • They are more aware of credit and delinquency trends that can impact a successful settlement.
  • Having professional representation can level the playing field during creditor negotiation.
  • Debt settlement companies handle all the paperwork, so there is less stress and hassle on you.

If you decide to work with a company, do your research. Check with the Better Business Bureau to see how the company rates and see if any government action has been taken from a state or federal Attorney General’s office. You can also check out independent third-party review websites.

Don’t make a final decision until you talk to a debt settlement representative.

Avoid using anyone who charges nonrefundable upfront fees. If your creditors reject the company’s offer, you will still be on the hook for the debt, your credit will be ruined, and you now have to pay those bogus fees. only connects Americans with legitimate debt settlement companies. We also only connect people with debt settlement if it can really save them money. Use Instant Debt Advisor℠ to see if debt settlement is the right solution for you and your debt. It’s free and has no impact on your credit. Instant Debt Advisor℠ puts you in control of your debt-free journey. There’s no sign-up or commitment until you’re ready.

When the debt settlement process works

Debt settlement usually only works when you haven’t made payments on your debts for a certain amount of time. If you’re current with your payments, there’s no reason the creditor would accept a partial settlement offer. You need to be at least a few months behind to qualify – or sometimes more.

Once you begin the process, there are two types of settlement offers you can make. In both cases, you are offering to settle your debts for less than you owe, but they differ in how that money is delivered:

  1. A one-time lump-sum payment
  2. A payment plan

The first option is usually more successful, because most creditors feel if you can commit to paying something over a period of time, you should be able to pay back what you owe even on a defaulted debt. Typically, a creditor will only accept payments over a period when it makes sense to break the payments up over a short time span.

For example, if you owe $15,000 to a creditor and offer a $6,000 settlement, the creditor may be willing to accept that settlement in $1,000 installments over a six (6) month period. Outside of this kind of arrangement, there is very little incentive for a creditor to accept a long-term payment arrangement to forgive 40-60 percent of the balance owed.

A best-case scenario for settlement is when you already have the money available to make the offer. If you get money from a court judgment, the sale of an asset, or some other kind of windfall, then you can use that money to settle your debts. But in most cases, people aren’t that lucky.

With lump-sum settlements, you have to save up in order to make your settlement offer. Many debt settlement companies will recommend you stop paying your monthly credit card bills so you can build up money for the settlement.

Where debt settlement can get risky

You are basically ruining your credit while working under the assumption that your creditor will accept your offer. If they don’t accept it, your credit will have taken a huge hit and you might end up in bankruptcy court, which costs even more in credit penalties and fees.

This is where a reputable debt settlement company can step in and guide you on the best course of action.

Once they evaluate and enroll you in a program, a debt settlement company will handle the negotiations, organize your payments into an escrow account, and eventually deliver the financial peace of mind you were hoping to find.

How Much Could You Save?

Just tell us how much you owe, in total, and we’ll estimate your new consolidated monthly payment.