Debt Settlement Company Definition & Meaning

Debt settlement company summary:

A debt settlement company helps people reduce their debt and get rid of it for good.
Debt settlement companies negotiate with creditors with the goal of reducing the total amount of money you owe.
There are certain types of debt you typically can and cannot settle using a debt settlement company.

What Is a Debt Settlement Company?

A debt settlement company is a company that aims to help people get rid of their unsecured debt for good. Unsecured debt is debt that isn't backed by something of value, such as credit card or personal loan debt.

Debt settlement companies negotiate with creditors with the goal of reducing the total amount of debt you owe. In a settlement agreement, your creditor agrees to accept less than you owe to get rid of your debt and forgive the rest.

More on Debt Settlement Company

When you're juggling many different debts, it's natural to want to find a way out. One option may be working with a debt settlement company.

When you first meet with a debt settlement company, they'll generally walk you through their program so you understand how it works.

These are the steps of the typical debt settlement process:

You work with your debt settlement company to come up with an affordable monthly deposit
The money goes into a dedicated account earmarked for your debt
You stop paying your creditors once you enter into a debt settlement program
The money in your account is used to pay your creditors when an agreement is reached

Debt Settlement Company: A Comprehensive Breakdown

Your debt settlement company works to negotiate with your creditors to reduce the amount of money you need to pay to get rid of your debt. When an agreement is reached and you approve, your debt settlement company will use the funds in your dedicated account to pay your creditor according to the agreement.

Debt settlement companies can’t charge an upfront fee for debt settlement services—it’s illegal. You are only asked to pay the settlement fee once a debt settlement agreement with creditors is reached and you've approved it.

Only certain types of debts can be negotiated through debt settlement companies These typically include:

Credit card debt
Unsecured loans, like personal loans
Medical bills
Utility bills
Private student loans, in some cases
Business debts, in some cases

A debt settlement company generally can’t negotiate other types of debts, such as:

Federal student loans
Tax debt
Court-ordered debts, such as alimony or child support
Secured debt, like a mortgage or auto loan

A reliable debt settlement company typically has positive reviews on the Better Business Bureau site and TrustPilot sites. Membership in the American Association for Debt Resolution (AADR), an industry organization that accredits debt settlement companies, could be another sign of an established company.

Red flags that signal a possibly shady debt settlement company include:

Promises to reduce all debts for a single fee
Claims they can halt debt collection calls and lawsuits
Requests for upfront payment before they settle debt
Guarantees they’ll make all debts disappear

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Debt Settlement Company FAQs

The right solution for you depends on your situation. Debt management has a lower success rate than debt settlement, but that's because many people can't afford the monthly payment. If you can safely afford to make your debt management plan payment, it's a good solution because it costs very little and doesn't hurt your credit much. But if you can't afford your debt, debt settlement may be a better way to go. The Federal Trade Commission (FTC) says that debt settlement is more affordable than debt management.

Debt settlement and bankruptcy will both appear as negative marks on your credit report and will almost certainly lower your credit score. Debt settlement may have less of an impact than bankruptcy on your credit scores over time. How much debt settlement lowers your score depends on your starting score.

If you're already missing payments, then debt settlement may not hurt you much. If you have a perfect history of on-time payments, then stopping payments or settling your debts may cause your credit score to drop fast. Once your debts have been settled, your score should increase over time if you pay on time, keep your credit card balances low, and avoid applying for credit until you need it.

No. Not only is it not worth it, it’s against the law. If you're asked for a debt settlement fee before services are rendered, that's a sign of a possible scam. Reputable debt relief companies only charge a fee when they reach a debt settlement agreement, you approve it, and at least one payment is made to the creditor. For perspective, typical debt settlement fees are 15% to 25% of the amount of debt they settle on your behalf.