What Is Debt Settlement?

What Is Debt Settlement?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Debt settlement is a negotiated agreement between a debtor and a creditor where the debtor pays less than the full amount owed. This process typically involves the debtor saving up a specified amount of money over time, and then offering this sum as a one-time payment to settle the debt. Creditors, usually feeling that some money is better than none, may agree to the settlement offer. However, it’s worth noting that debt settlement can still negatively impact one’s credit score and history.

Related Questions

1. Can anyone opt for a debt settlement?

Yes, but it is usually an option considered by those who are significantly behind on their payments and unable to afford the total debt amount. It’s best to consult with a financial advisor before choosing this path.

2. What are the downsides to debt settlement?

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Debt settlement can harm your credit score significantly as it often requires missing payments to save enough for a settlement offer. Additionally, there may be fees and tax consequences associated with a settled debt.

3. Are there alternatives to debt settlement?

Yes, alternatives may include a debt management plan, bankruptcy, or consolidating your debts into a lower interest rate loan.

4. Can debt settlement erase your whole debt?

The goal of debt settlement is to reduce your overall debt. It might not erase the whole debt but can potentially make it more manageable.

5. Who negotiates a debt settlement?

Typically, debt settlement is negotiated by the debtor or by a professional debt settlement company hired by the debtor. However, keep in mind that such firms charge fees for their services.