Being in debt is a constant source of stress. You struggle to make your minimum payments, but your balances never seem to budge. And if you fall behind and a debt goes to a collection agency, there’s the added stress of constant calls and collector harassment.
If you’re stuck in this type of situation, it may be time for debt settlement. It’s a solution that may help you to get out of debt faster for a percentage of what you owe. You’ll enjoy the relief of getting settled and knowing you can finally move forward without all that financial stress.
What is debt settlement?
Debt settlement is a debt relief option that focuses on getting you out of debt for a percentage of what you owe. It’s also commonly called debt negotiation because you negotiate to only pay back a portion of the outstanding balance. In exchange, the creditor or collector discharges whatever is left. As a result, debt settlement is often the fastest, cheapest way to get out of debt without declaring bankruptcy for many consumers.
Ready to see if debt settlement is right for you? Talk to a certified debt resolution specialist for a free evaluation.
How does debt settlement work?
Debt settlement works differently depending on the status of the debt and who initiates contact to begin the settlement negotiation. But there are four basic ways that debt settlement can work.
- Respond to a debt settlement offer from a collector
- Try to negotiate a settlement on your own
- Contact a settlement company to set up a debt settlement program
- Work with a state-licensed debt settlement attorney
Method 1: Responding to a settlement offer
Settlement offers usually only come when a debt has been sold to a third-party collection agency or debt buyer. These entities buy debt that credit card companies and service providers write off. They purchase bad accounts for pennies on the dollar of what’s owed. As a result, even recouping a small percentage of the original balance you owed is a financial gain for them. So, they make offers to settle your debt, either by phone or by mail.
If you receive a settlement offer:
- Always insist that the collector send you the offer in writing.
- Make sure the debt is yours and that the collector has a legal right to collect BEFORE you acknowledge any obligation to pay. To do this, ask the collector to send you paperwork that verifies the debt.
- Only correspond with the collector by mail.
- Always try to negotiate the collector down from their initial offer.
- See if they will agree to pay for delete, which may remove the collection account from your credit report in exchange for payment.
Method 2: Negotiating settlements on your own
With this method, you contact a company first and make a settlement offer. You offer a certain percentage of what you owe and request for the remaining balance to be discharged. You can use this method with debt collectors, medical service providers for unpaid medical bills, or with a credit card company if your account is behind but still with the original creditor.
This is the method most commonly used when someone has a debt that they just want to be free of. Results may vary. You’ll usually have the easiest time negotiating with a debt collector. However, if you have a credit card that’s behind and you know you won’t be able to pay, you may find a creditor that’s willing to settle. Just keep in mind it often takes a higher percentage to get a creditor to settle.
Method 3: Enrolling in a debt settlement program
This is the most common type of settlement and often the most likely to get consumers the results they want. It allows you to settle multiple debts without having to negotiate on your own. You contact a debt settlement company to set up a settlement program. Here’s how you work with an accredited company:
- In a free consultation, a certified debt resolution specialist reviews your debts and budget.
- They will often make recommendations on which debts would be best to include in the program.
- They also check your credit and ask about your credit goals to make sure settlement is the right solution for you.
- Once they confirm you’re a good fit for the program, then it’s time to generate the money to make settlement offers
- Since most people usually don’t have a large lump-sum of cash just sitting around, the settlement company will usually set up a Trust Account. They’ll work with you to find a monthly amount you can afford to set aside in this account.
- You send them that amount each month and they hold the money in escrow until you have enough funds to start making offers.
- They call each of your creditors to negotiate.
- Once they reach an agreement that satisfies both sides, you sign a formal settlement offer and the money is paid out of the escrow account.
- The company also takes fees from the money saved in escrow, which is a percentage of the original balance you owed.
- All settled accounts are reported to your credit report as “paid as agreed.”
Debt.com can connect you with the right debt relief options for your unique financial situation.
The credit effects of settling a debt
Debt settlement may negatively affect your credit score, but not in all cases. In certain situations, there are ways to negotiate around the seven-year penalty you typically face for settling a debt. In normal circumstances, settling debt will create a negative item in your credit report that sticks around for seven years. When the clock starts depends on the status of the debt at the time of the settlement.
- If the debt is still with the original creditor, the seven-year clock starts from the date that the debt first becomes delinquent.
- On the other hand, the clock on a settled collection account starts from the date the collector discharges the remaining balance.
In either case, the account will generally be listed in your credit report as “paid as agreed.” This is considered negative information. However, it will have less of a negative impact than simply leaving a debt charged-off or in collections.
There are tricks like pay for delete and re-aging that could provide a way to potentially avoid the damage. However, these methods are not guaranteed. Even if you negotiate these into your settlement, the negative information may reappear later. So, it’s best to go into a settlement with the assumption that your credit may take a hit.
How to avoid getting scammed
Although there are plenty of accredited debt settlement companies that want to help you, there are also people out there that will prey on your desperation to get out of debt fast. These companies charge high upfront fees with a promise to settle your debts. Then they disappear with your money and leave you in a lurch.
Here are a few signs that a settlement company is out to scam you:
- They require upfront fees, which violate the Federal Trade Commission advance fee ban on debt relief services.
- They advise you to do something illegal, such as stopping all payments to the credit companies you have open accounts with.
- During your free consultation, they refuse to discuss other solutions versus debt settlement or try to make their service seem like another solution.
- The company is not a member of a nationally recognized trade association, such as the American Fair Credit Council.
Debt settlement for specific types of debt
Credit card debt is the most common type of debt seen in a settlement, but it’s not the only type you can settle. If you have other types of debt that you want to get out of for less than you owe, we have some additional guides that can help you.
Medical debt settlement
Unpaid medical bills can quickly turn into collection accounts. Whether you’re facing collections because of insurance gaps you didn’t know you had or out-of-pocket expenses that your insurance didn’t cover, you need to be proactive if you want to avoid credit damage that medical debt can cause. Learn about new credit reporting rules related to medical debt and what you can do to solve these challenges.
Private student loan settlement
Although it’s not possible to settle or discharge balances on federal student loans without declaring bankruptcy, it may be possible to settle private student loan debt. Some student loan servicers may be willing to let you out of a student loan for less than you owe. However, you need to go into the settlement negotiation with realistic expectations and the right negotiating tactics.
Tax debt settlement
If you owe tens or even hundreds of thousands of dollars to the IRS, it may be possible to settle it. In fact, thanks to the Fresh Start Initiative, it’s now easier for taxpayers to settle with the IRS. This guide will explain how to negotiate a settlement and what you can realistically expect from the IRS.
No matter what types of debt you owe, Debt.com can match you with the best debt relief services for your need.
Article last modified on March 18, 2020. Published by Debt.com, LLC