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Debt Destroy

What is Debt Settlement and Is it Right For You?

If you're seeking an alternative to bankruptcy due to excessive debt that you can't pay, you may be considering debt settlement. Settling your debt is when you negotiate with your creditors to lower the amount you owe. While there are a number of debt settlement companies that exist to help you get rid of your debt – you may be better off doing it on your own. There are many risks associated with using debt settlement companies, including outrageous fees for their services.

Why Do Creditors Agree to Settle?

Many creditors would rather accept less than what you owe than send you collection notice after collection notice in an attempt to recover what you owe them if you have fallen behind on your payments. A debt settlement is when a creditor accepts 20-75% of what you owe in a one-time payment and then forgives the rest of the debt owed. They will then report to credit bureaus that the amount owed has been “settled”. The history of delinquent payments and charge-offs that may have occurred on the settled account prior to the pay-off date will remain on your credit report.

Creditors are not likely to agree to settlement options if consumers are up to date with their payments. Many won't talk to you about settlements unless you are three to six months behind on payments – and have been unresponsive to debt collection attempts. This means you'll spend three to six months screening your calls and not paying anything toward the debts you hope to settle on. During those three to six months, you would put as much money aside as possible to use to pay the company off when they agree to settle.... IF they agree to settle! There are no guarantees that a creditor will agree to settle, and you do take the chance that after not paying them for three to six months, possibly lowering your credit score even more, the creditor will refuse to settle.

Debt Settlement Companies

A number of companies exist nationwide to help consumers settle with their creditors. As the economy continues to weaken, even more debt settlement companies are popping up in hopes of getting business from the large percentage of American's who are struggling under excessive debt.

The problem with debt settlement companies is that they often charge excessive fees for their services, and you probably won't know up front how much you'll actually pay for the service. Some companies charge 15-20% of your total debt, plus an initial sign-up fee and ongoing monthly service charges. Some companies charge a monthly service fee instead of a percentage of your debt.

The companies are supposed to be able to help you negotiate with your creditors. Many people who have worked with debt settlement companies have reported that they weren't able to get all creditors to negotiate the amount owed. You're required to set up an escrow account when you use most debt settlement companies, and this is where your service fees, sign up fee, and/or monthly fee, as well as the monthly amount you are paying the debt settlement company to pay your creditors with, is deposited each month. It's also where the debt settlement company withdraws their fees. Some consumers have reported over a two year period that they made their monthly required payments under the debt settlement plan to the company, and the only payments to come out of that escrow account were those made to the debt settlement company. Meanwhile, the consumers continue to get phone calls and debt collection notices from creditors looking for their money – because nothing has been settled during this time.

Some creditors will escalate the accounts if they realize you are working with a debt settlement company – which means they may send your account to a collections agency sooner than they would have otherwise, or attempt to sue you. If a creditor takes legal action, most debt settlement companies will drop your account because they don't have the ability to represent you in court or give legal advice.

Should You Attempt to Settle Your Debts?

Debt settlement is only a good option for people who are heading toward a bankruptcy but don't qualify for filing Chapter 7. In a Chapter 7 bankruptcy, most unsecured debts are written off but you may sell your home or other property). If you qualify for a Chapter 7, chances are you don't have the cashflow available to make a debt settlement option work for you, since it requires paying a percentage of your debts back to “settle” them and close the accounts.

If you are able to scrape together enough money to pay your debts through a debt-management program, where you are working to pay off all of your debt under lower interest rates – then by all means choose that option over debt settlement. It's better for your credit score.

If you've been pretty good about keeping up with your debts, you'd have to allow your accounts to go three to six months late before a creditor would consider you for debt settlement. If your credit score is reasonable now, you would completely damage it by going with a debt settlement.


Kairon - Debt settlement has now become a popular measure of closing bad debt accounts. Many people are also opting for this system to foreclose their loan accounts, even if it has not turned to a bad debt. These services help people to negotiate the total repayment amount with the lenders so that one can earn a significant sum of discount on the total outstanding.
Marc Wanye (Guest) - Debt Free Alternative to Bankruptcy We are committed to operating with the highest standards of honesty, integrity and professionalism. These standards include: 1.  Always treat our clients with the utmost respect and consideration. 2.  Ensure our communication with clients is always honest and sincere. 3.  To only provide advice that is focused on the clients welfare and best interest. 4.  To refrain from engaging in any activity that does not benefit all parties involved.   If you are serious about resolving your debt problems and would like to receive a free debt consultation with an unbiased financial professional contact us today!   Discover how our free debt counseling program can help you.  Call us at 1-866-726-2122 or visit us online at for a Free 15 Minute Evaluation.
Michael (Guest) - Actually Sandra, any debt settlement company worth its salt will help you fill out the appropriate forms so that you don't have to pay taxes on the settled debt.  And if you can't qualify to have the taxes waived, you probably should have never been taken on by them as a client to begin with.
Sandra (Guest) - Your advice is true but lacking one very important detail.  The IRS.  Whatever the balance that your creditor dismisses from the total amount you owed, to what you agreed to pay, that difference is reported to the IRS as income for you and the IRS will send you a 1099 form and whatever the amount that you did not pay will become taxable income.  Example:  You owe "Credit Card Co." $10,000.00.  You settle for $6000.00  You will now owe the IRS taxes on the $4000.00 difference.  If you have multiple debtors you plan on settleing with, remember each portion of each debt dismissed will be taxable income and the IRS doesn't care why you did it, or what your circumstances are.  If you don't pay your debtor you will pay the IRS
rustyd - I think the most important thing to remember is financial hardship. If you have a valid reason to give creditors you will get great settlements. Think hard and be creative but honest. Medical disability works wonders!!!