Debt Settlement
Negotiate to Pay Less Than You Owe
Debt settlement involves negotiating with creditors to pay a lump sum that's less than your full debt balance. This option typically involves stopping payments to creditors while saving money for settlement offers, which can be done independently or through a debt settlement company. While settlements can significantly reduce your total debt, the process can severely impact your credit score and may have tax implications, as forgiven debt is often considered taxable income. Success depends on creditors' willingness to negotiate and your ability to save enough for settlement offers.
Pros
- Reduce total debt amount
- Single lump-sum payment
- Can resolve debt faster than minimum payments
- May prevent bankruptcy
- Works with multiple types of debt
- No collateral required
Cons
- Severe credit score damage
- Tax liability on forgiven debt
- Collection calls may increase
- Not all creditors will settle
- Risk of lawsuits during process
- High fees if using settlement company
- Must have lump sum available
Qualifications
Works best with unsecured debts like credit cards, medical bills, and personal loans. Secured debts typically don't qualify.
Must demonstrate legitimate financial difficulty to encourage creditor negotiation.
Ability to save approximately 50-75% of the debt amount for settlement offers.
Accounts should be delinquent or in collections for best settlement chances, though this severely impacts credit.
The Process
- 1Stop Payments to Creditors
- 2Save Settlement Funds
- 3Negotiate with Creditors
- 4Review Settlement Offers
- 5Make Lump Sum Payment
- 6Get Settlement Agreement in Writing
Timeline
6-36 Months
