Debt Settlement

In this lesson you’ll learn how you may be able to use debt settlement to get some of your debt forgiven by paying off a part of it.


Debt settlement is a process where a lender accepts one large payment, typically 10 to 50 percent of your total loan balance, in exchange for forgiving your debt. Debt settlement is sometimes referred to as debt relief or debt adjustment. When you begin working with a debt settlement company, they typically ask you to stop making payments on all of your debts and begin making a payment to them. When you’ve paid them enough, they begin offering your lenders money to forgive your debts. Lenders are not obligated to accept those offers, though some do. Others may choose to sue you and you’ll almost certainly receive harassing phone calls from collection agencies trying to collect on your debt. Because it’s common to be sued by lenders during this process, many debt settlement companies employ lawyers who will represent you in court. This makes debt settlement more expensive than credit counseling, though you may make up some of the cost by paying less toward your debts. This Investopedia article describes the benefits and drawbacks. This article lists some questions to ask a debt settlement company before signing up such as:

  • Are you an IAPDA-certified debt consultant?
  • Are you being paid a commission?
  • How long have you been in the debt settlement business and how much debt have you settled?
  • Are you a member of the American Fair Credit Council?
  • Are you licensed to do business in my state?
  • Will all of my creditors work with your company?
  • What are your fees?
  • Can you tell me exactly how long this will take and exactly how much this will cost?
  • When can I expect my first settlement?
  • How are you calculating my estimated savings?
  • Will you be making monthly payments to my creditors?
  • Who is holding my money while I’m waiting on a settlement?
  • Can I get sued?
  • Will debt relief have a negative effect on my credit report?
  • Are there tax consequences I should be made aware of?
  • Are there other alternatives to debt settlement?
  • When will I hear from you next?

Debt settlement may be appropriate for you if you are unable to afford to pay off your debt and your credit score is poor because debt settlement will damage your credit score.