Debt Settlement

In a typical debt settlement arrangement, you (or a company you hire) negotiate directly with creditors or debt collectors to accept a lump sum that is less than the full balance as payment in full. It is not a court process and does not automatically stop lawsuits or collection activity.

Many settlement programs ask you to stop paying enrolled creditors and instead deposit money into a dedicated savings account. Funds accumulate until there is enough to offer a lump-sum settlement, which can take months or years and generally causes accounts to go delinquent.

The FTC's Telemarketing Sales Rule restricts debt settlement companies from charging fees before they settle a debt and the consumer has made at least one payment under the settlement.

Settlement programs commonly take roughly two to four years to resolve all enrolled accounts, though this varies widely based on how much you can save each month and how creditors respond.

Some accounts may settle earlier than others; there is no guarantee every creditor will agree to negotiate.

For-profit settlement companies typically charge a fee based on either the enrolled debt or the amount of debt they settle, generally collected only after a settlement is reached and at least one payment is made, under FTC rules.

Forgiven debt may create a tax liability; the IRS treats most cancelled debt as taxable income unless an exclusion applies (for example, insolvency).

Late fees, additional interest, and potential legal costs can accrue on accounts while they are delinquent and unsettled.

Because most programs require you to stop payments to build a settlement fund, enrolled accounts typically become delinquent and are reported as such, which can substantially lower credit scores during the process.

Settled accounts are usually reported as 'settled for less than the full balance,' which can also affect creditworthiness for a period of time after completion.