Debt Settlement

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What is Debt Settlement?

Definition of Debt Settlement
Negotiation with creditors to accept a reduced balance payment that will discharge an unsecured debt. Debt Settlement negotiation seeks to lower the principal balance amount owed, unlike a Debt Management Plan (DMP) that seeks only to reduce interest payments.

The best debt settlement outcome sees your debt discharged after payment of a sum considerably less than the original amount owed. Even the best debt settlement outcome carries risk and implications for your credit report, showing that the debt was subject to a paid settlement resulting from a debt settlement negotiation instead of being routinely "paid in full".

debt settlement negotiation

Debt Settlement Features

  • Debt settlement is for unsecured debt only. Not relevant for secured debt, like auto loans, mortgages or any debt secured against collateral.
  • No loan is involved.
  • Debt settlement is an ongoing payment plan (savings plan) - until such time as a debt settlement agreement is reached.
  • A debt settlement agreement normally involves making a lump sum payoff using monies that you have saved and accumulated under a debt settlement program, however a stipulated debt settlement agreement may involve a repayment schedule as a negotiated outcome.
  • It typically requires a total of at least $5000 or more of original unsecured debt to qualify for a debt settlement reduction scheme run by a service provider.
  • All debt settlement reduction plans involve regular routine payments into a savings account that is used to settle debt.

The choice to settle debt is a risky proposition offset by the potential for great savings when you settle debt compared to paying back 100% of the original debt liability. Debt negotiation and settlement and synonymous, that is the terms debt negotiation and settlement are used interchangeably hence:

Debt Settlement AKA: Debt Relief, Debt Negotiation, Debt Reduction, Debt Arbitration

Confused? See our summary of Debt and Consolidation


How Does Debt Settlement Work? 

- You enroll your debt into a debt settlement program run by a debt settlement provider organization.
- With debts settlement, each month you make routine deposits into a "special purpose account" or debts settlement "trust account" in order to accumulate funds for the purpose of debt settlements.
- This account is managed by a third party (not the debt settlement provider).
- Your account for debt settlements should be held in an insured bank and should be controlled by you for the purpose of accessing funds (not the debt settlement services).

- You may be required to have payments deducted automatically from your checking account, and you may be required to first route the monies through the debt settlement organization in order that they collect their fee before investing the balance into your trust account.

- Upon enrollment you are advised by the debt settlement organization not to make further payment to your creditors in order that you may redirect all available monies at your disposal into the trust account for debt settlements.

- Only when you have saved and accumulated sufficient money for debt settlements in your trust account does a debt settlement negotiation commence. Furthermore, creditors will not typically entertain debt settlement until your account is at least 3-6 months past due.

- Upon sufficient funds accumulated, the debt settlement provider contacts one creditor and attempts to get them to accept a lump sum as settlement. Debt is addressed in priority sequence.

- Given negotiation success, your funds are depleted and you continue to save towards the next lump sum settlement debt goal necessary. This cycle or program continues until you settle your debt grand total.

- Each time a debt is settled, your funds must accrue or build up before the next debt settlement negotiation begins.

- Some providers could operate differently and approach debt settlement negotiation with each creditor negotiations simultaneously IF sufficient funds were available in the trust account.

- Late fees and interest charges continue to accrue on creditor accounts until any debt settlement is finalized so adding to the debt.

- Upon success your receive a debt settlement letter confirming that your debt is discharged.

- There may be some flexibility regarding the monthly payment amount that you make into the trust savings account. You can always pay more and you may be able to pay less, subject to a minimum under the terms of your debt settlement agreement

Debt Settlement Agreement - Possible Outcomes When Settling Debt

When approached, creditors have debt settlement options and are under no obligation. Debt settlement options include settling debt immediately with a debt settlement offer through no debt settlement offer and instant litigation. 


Possible Outcomes:

  1. Your creditor accounts are each paid off individually by means of a lump sum debt settlement for an amount less you would have been liable for.
  2. Stipulated Agreement - a reduced debt balance and/or interest rate is agreed upon by a creditor and the arrangement requires that you make structured repayments. You make payments for 3 to 6 months for example, until settlement of debt.
  3. Failure. In some cases settlement of debt cannot be agreed upon because:

a) You fail to achieve sufficient funds accumulated into the trust account (no debt resolution).

b) Regardless of funds, the creditor will not agree and threatens litigation (sue you to collect) forcing the debt settlement organization to offer you a repayment plan whereby you pay 100% of the original balance plus creditor's interest and penalties and still pay the debt settlement debt negotiation fee.

c) The creditor simply proceeds with litigation against you.

Debt settlement debt negotiation is a process that can be attempted on your own. How to settle debt on your own? Later we discuss how to settle debt yourself.

When To Consider Financial Debt Settlement

Debt settlement is best suited when:

  • You have a significant amount of unsecured financial debt.
  • Settlement seems a viable option having read about other options listed on this website such a Loan and DMP.
  • You have a damaged credit history.
  • You cannot or do not want to file for Bankruptcy Chapter 7.
  • You reject the idea or have attempted a Do it Yourself approach.
  • You could access a lump sum of cash and/or you can meet with the likely program payments required.
  • You do not have recent account activity.
  • If you are suffering "financial hardship" that can be evidenced to a creditor (e.g. divorce, job loss, huge medical bills) then debt settlement may be viable but first seek financial counseling. Debt settlement is a long-term commitment.
  • When after counseling debt settlement is advised


Why - Settle My Debt?

You may be wondering why settle my debt: 

  • The potential to significantly reduce the amount of debt liability.
  • Avoidance of bankruptcy if successful.



  • Unsecured debt settlement only. At least $ 5000 in total unsecured debt. Settlement requires that each balance enrolled is subject to a minimum amount (perhaps several hundred dollars).
  • Some types of non-secured debt may be problematic e.g. payday loan debt settlement. Given small scale creditors, payday loan debt settlement may or may not qualify.



Free debt settlement is not possible but Federal Trade Commission rules applicable to some debt settlement operators state that a fee should only be charged for after:

- You have a signed service agreement in place

- A debt settlement or outcome result is determined

- You accept and authorize the settlement or debt settle result.

This does not guarantee that all providers will adhere to this. Furthermore, many companies are exempt by default. Industry debt settle fees are not standardized in amount (and can vary greatly) or in approach but may typically reflect:

- % of debt total enrolled for debt settlement 

- % of total debt balance saved through negotiation

- Flat monthly charge

- Sign up fee.

Some companies take their fee to settle debts (legitimately) before you start accumulating trust account savings to settle debts and any settlement negotiation has even begun.


On average debt settlement processing takes about 2 years. This reflects a typical customer circumstance, however debt settlement processing may last from a few months through 3 years or more.

Debt Settlement Providers

For Profit Debt " ~ " Company or Agency. Non Profit Organization / Agency. Law Firm Specializing (Debt Settlement Attorney). Tip: Forget the notion that Non Profit is better, free, lower cost or even necessarily reputable. This is a provider's tax status; some fraudulent operators hold this status. 

Business debt settlement is not pursued by a consumer debt settlement business. Debt settlement here requires special advice. Later we discuss debt settlement companies and offer some basic debt settlement advice including the notion of debt forgiveness. We continue to look at the advantages and disadvantages of debt settlement together with things to watch for in our article entitled Debt Settlement Program.

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