What Is Debt Settlement?
- Debt settlement is a method for paying off unsecured loans like credit card balances or medical bills.
- Usually, you stop making payments to your creditors and save a lump sum to offer as payment in full.
- Then, debt settlement companies negotiate reduced payoffs for your debts.
Debt settlement is a method of debt relief where you or a company you hire negotiates with creditors to reduce the amount you owe on your debt. Sometimes, people refer to debt settlement as debt negotiation or debt resolution—but both terms actually refer to parts of the debt settlement process.
Debt settlement is the type of service Freedom Debt Relief offers. In fact, Freedom Debt Relief is the largest debt settlement provider in the country and has enrolled over 750,000 clients since its founding in 2002. Through its debt resolution services, Freedom Debt Relief has settled more than $10 billion in debt. However, just like any debt solution, debt settlement has its pros and cons, as this article will discuss.
How the Debt Settlement Process Works
A key part of the debt settlement process is debt negotiation. That’s when a creditor agrees to reduce the amount you owe and “settle” the debt for less. Believe it or not, this is a very standard process for creditors and other companies that manage debt. Many creditors routinely settle accounts for less than the amount owed. Your creditors may be among them.
You could try to negotiate and resolve your debts on your own, if you have the time and negotiation skills required. If you want to try this tactic, you just need to contact your creditors directly, negotiate with them to reduce what you owe, and get a written agreement that outlines the terms of your negotiation.
Negotiating with creditors on your own can be a long and laborious process. That’s why many people turn to professional debt settlement companies like Freedom Debt Relief for help. Using over 15 years of experience getting great settlements with creditors, our professional debt negotiators are able to more effectively and more efficiently negotiate settlements on your behalf—while you carry on living your life.
Negotiating with creditors on your own can be a long and laborious process. That’s why many people turn to professional debt settlement companies for help.
With Freedom Debt Relief, as well as most other debt settlement companies, the client starts the process by accumulating savings in a special purpose account they own. At Freedom Debt Relief, we determine our client’s monthly deposit at the start of the program, customizing their debt relief plan based on their goals, total debt amount, and budget. These savings will eventually be used to pay the settlements we reach with their creditors. Meanwhile, as they build the funds, we create the client’s custom negotiation strategy based on their particular mix of creditors and debt amounts in order to maximize our clients’ savings.
Like any other reputable debt settlement company, Freedom Debt Relief earns money when clients pay us a fee for our negotiation services. No reputable debt settlement firm may charge fees at any other point for any other reason, per regulations established by the Federal Trade Commission (FTC). The fee is typically a percentage of the total amount of debt enrolled in the debt settlement program and can vary depending on the client’s state of residence.
Once negotiation is complete and a creditor agrees to a lower settlement, the client is presented the settlement for their approval. Once the client approves the settlement, the payments will be processed to the creditor according to those terms directly from their special purpose account. Sometimes, the settlements involve one lump-sum payment. Other settlements may be structured settlements, which means the funds would be paid in multiple payments over time. When the agreement is complete, the debt is considered resolved with the creditor, and the debt resolution services on that debt are complete.
Learn more about debt settlement. Find out how debt settlement compares with other popular debt relief options.
Types of Debt Eligible for Debt Settlement
Usually, only unsecured debts are eligible for debt settlement. “Unsecured” means the debt isn’t tied to an asset, such as a car or house. Examples include:
Credit card debt
Department store charge card debt
Personal loan debt
Some private student loan debt
Debt settlement will not work with some kinds of debt, such as secured debt, which is a loan secured by a tangible asset. Examples of debts that can’t usually be negotiated include debt from:
Mortgages or home loans
Federal student loans
Other government loans
IRS (overdue taxes)
There is small business debt settlement, but it isn’t as straightforward as other types of unsecured debt. If you are a small-business owner and use personal credit cards for business expenses, debt from those cards could be enrolled in a debt settlement program. Typically, though, a debt settlement company can’t help with business debts.
Every option for eliminating debt has advantages and disadvantages. If you think debt settlement could be right for you, learn more by reviewing these pros and cons.
Struggling with credit card debt?. Learn about solutions that could help.
Pros of Debt Settlement
Resolves all debt enrolled in the debt settlement program: Debt settlement doesn’t just move higher interest-rate debt to lower interest-rate debt. Debt settlement works to lower the principal balances you owe so you can put it behind you faster than you could with a loan.
Streamlines debts into one monthly payment: You make a monthly deposit into a debt settlement special purpose account in an amount that fits your budget. This deposit could be less than the minimum payments on your credit cards or monthly payments on a debt consolidation loan. It is also usually much less than the monthly payment in a debt management plan offered by credit counseling agencies.
Costs less than alternatives: Debt settlement typically costs less than a loan, since a loan charges interest on top of what you owe. In addition, settling debt generally costs less than what you will pay by making minimum credit card payments.
Has better repayment terms than bankruptcy: Debt settlement programs usually provide better repayment terms than do Chapter 13 bankruptcy filings. Plus, debt settlement helps people get out of debt without leaving a permanent bankruptcy judgment on their record.
No conflict of interest with creditors: Unlike credit counseling agencies that often accept “good faith” payments from credit card lenders, debt settlement companies work only on the consumer’s behalf.
Encourages better money habits: The best debt settlement companies help clients learn to create and use a budget, and incorporate simple personal finance best practices into their lives. Many people also benefit from the discipline required in making regular deposits into their special-purpose account that funds their own debt settlements.
Cons of Debt Settlement
Impacts credit reports and scores: The debt settlement process requires you to go past due on accounts so that creditors will be willing to negotiate. That requirement can be uncomfortable, and it can result in a negative impact on your credit reports and credit scores.
Creditor or collection agency calls: Because you are falling past due, creditors may continue to contact you. Freedom Debt Relief offers options and information to its clients on how to handle these phone calls.
Potential legal action: Some creditors may threaten legal action or actually take legal action for repayment. A good debt settlement company will support its clients through this process. At Freedom Debt Relief, we offer an optional service with an outside law firm to represent clients should legal issues arise.
When Is Debt Settlement the Right Solution?
Debt settlement is not the right solution for someone who has less than $7,500 in unsecured debt. If you need help with debt and have less than $7,500 of unsecured debt, credit counseling may be a better alternative.
Debt settlement also is not the right solution for someone who is focused on maintaining a high credit score during the process. In debt settlement, you need to be comfortable with the idea that your credit score could go down before it goes up again. If you have a high credit score and want to protect that score more than you want to put debt behind you for good, a debt consolidation loan may be an option to consider. Learn more about when it is a good idea to get a debt consolidation loan.
Debt settlement programs are best for people who are:
Struggling with at least $7,500 in unsecured, high-interest debt
Unable to keep up with payments on these debts
Suffering a hardship—divorce, the death of a spouse, job loss, or unexpected medical expenses— that makes it difficult to have any extra income to put toward debts
Looking for a solution that is affordable and will help them put their debt behind them, versus just consolidate all the existing debt to a new type of debt (like a loan)
Debt Settlement Companies
Negotiating debt settlements can be time-consuming and frustrating. That’s why many people turn to professional debt settlement companies, like Freedom Debt Relief, to provide this service.
Choosing the best debt settlement company to settle your credit card and other debts requires careful consideration. Enrolling in a debt settlement program is a major financial decision, and means taking steps to select a legitimate, credible company.
Enrolling in a debt settlement program is a major financial decision, and means taking steps to select a legitimate, credible company.
If you are considering a debt settlement program, we’d be happy to talk to you. You can call a Freedom Debt Relief Certified Debt Consultant anytime at 800-230-1553. We also encourage you to look at other debt settlement companies so that, if you do choose to enroll in our program, you are fully confident you are making the right choice!
What to Look for in a Debt Settlement Company
When you are evaluating debt settlement companies, it’s important to know how they operate. And as more consumers accumulate more debt, more debt settlement companies are appearing on the scene to take advantage of the opportunity. Unfortunately, not all have the history and experience to get the best results for clients. Here are some important things to look for when choosing a debt settlement company:
Length of time in business: The value of debt settlement is in the quality and effectiveness of the negotiation. The better job the debt settlement company does in negotiating, the lower your settlement—and the higher your savings—will be. A debt settlement company that has a long history of negotiating debt means they should have greater expertise and insight.
Open communication: The employees at the debt settlement company must be ready and able to answer any questions about how the process works, what you should expect, and what the fees will be. Beware of vague answers. Transparency into how the debt settlement process works is critical. Debt settlement programs are a commitment that can take a few years to complete, so you want to know you are working with a company that is supportive and will be there for you when you have questions.
Happy clients. Search trusted review sites to learn what it’s like to be one of the company’s clients. But note that just because a website has long articles and appears to be objective, doesn’t mean that it is. Look for words and phrases such as “sponsored content” or “ad,” or other disclaimers that show the so-called reviews really are paid advertisements. Also beware of any debt settlement review websites that include a lot of companies but don’t include Freedom Debt Relief. As the largest and arguably the most established debt settlement company in America, if we aren’t included in a review of top debt settlement companies, that website isn’t doing a thorough examination of your options.
Trained debt counselors: The company’s Certified Debt Consultants should be and trained in debt settlement.
Membership in industry organization: The (AFCC) enforces a strict code of conduct for its members. Debt settlement companies can join the AFCC only if they comply with the Federal Trade Commission regulations for the industry. For these reasons, AFCC membership is one sign of a reputable company.
Questions to Ask Debt Settlement Companies
How a debt settlement company responds to your questions will help you assess whether it provides the level of integrity, experience, savings, and customer service that you expect and deserve. To choose the debt settlement company that can best help you eliminate your credit card and other debt, make sure to ask these four key questions:
How much will the program cost each month?
What are the program’s negotiation fees?
How many creditors have you settled debts with?
Where can I read client reviews from real clients?
If you ask these questions and get vague answers, ask yourself if this is a company you could feel comfortable working with for 2-4 years. Trust your instincts when evaluating a debt settlement plan. If your “gut feeling” about a debt settlement company is negative, chances are that debt settlement company is not the best fit for you.
If your “gut feeling” about a debt settlement company is negative, chances are that debt settlement company is not the best fit for you.
Debt settlement is not the best debt solution for everyone. It requires you to have a strong commitment to getting out of debt, learn how to budget and live within your means, and be comfortable with having your credit score impacted. But for many people, it can help them resolve their debt for good and get on solid financial ground.
Is your debt settlement company legit? Find out how to identify a debt relief scam.
Take the Next Step
If you think debt settlement might work for you, give us a call at 800-230-1553. Our Certified Debt Consultants are ready to answer your questions. Or complete our online form right now to see if you qualify. You’ll also get a free estimate of how much the program could save you and how quickly it could help you put your debt behind you.
The answer to that depends on several factors. Here are a few:
How much debt do you have, and how serious is your problem?
Do you have access to money you could offer your creditors?
What is your income tax bracket?
Are you willing to file bankruptcy?
Can you handle the stress of collection calls?
Is your credit score high, or has it already been damaged?
The reason to consider these factors is that consumers who are not in deep financial trouble usually have less drastic options available – like debt consolidation. And consumers who are entirely insolvent or are facing lawsuits may find bankruptcy the best choice. High earners in the top tax bracket pay more tax on forgiven debt than those in lower brackets.
If you’re on the fence, you can contact a debt consultant at a debt settlement company who is trained to answer your questions and help you calculate the cost of debt settlement. Only if you know the cost can you decide if debt settlement is “worth it.”
DIY debt settlement is possible. First, decide how much you want to offer your unsecured creditors to settle your debt, and then make a plan to come up with the money. You’ll have to withdraw, borrow or save this amount before contacting your creditors.
If you have immediate access to a sum you can offer, debt settlement goes faster. In most cases, you’ll need to stop making payments for a few months to convince your creditors that you can no longer afford the debt.
When you’re ready to settle, contact your creditors and make them an offer in writing to settle your account for less than the balance owed. There are sample letters online that you can copy and use. Do not send any money until you have a written agreement signed by all parties.
It depends. You may be able to settle all accounts within weeks if you have access to a lump sum you can offer your creditors – for instance, a 401(k) account you can borrow against or savings account that you can tap. Otherwise, debt settlement timing depends on how long it takes you to save an amount to offer your creditors.
You can speed this up by cutting spending, selling unused items, and taking on a side gig for more income. You’ll also stop paying your unsecured accounts and put that money into your debt settlement savings. Once you have saved enough, you or your debt settlement company can begin negotiating with your creditors.
Most debt settlements take 24 to 48 months from beginning to end.