What Debts Can Be Settled?

You don't have to live with overwhelming debt. You have debt relief options that could help you get rid of your debt and move forward with your life.

Debt settlement involves negotiating with creditors to accept less than you owe and forgive the rest of your debt. This could be the answer to debts you simply can't afford to repay. But if you're considering debt settlement, you should understand what it can—and can't—actually accomplish. 

Debt settlement works for many debts, but not all of them. It comes down to the lender's options and whether it makes financial sense to settle.

These Debts Can Be Settled

As a general rule, many unsecured debts can be negotiated. These typically include:

• Credit cards

• Personal loans and lines of credit

• Medical bills

• Payday loans

• Store cards

• Private student loans

• Repossession deficiencies

• Personally guaranteed small business debt

• IRS tax debt (sometimes)

These debts are often eligible for settlement because the lender has no guarantee of repayment beyond your promise to pay. There's no collateral or asset that the lender can take if you don't repay what you owe. 

However, there's no guarantee that any creditor will negotiate with you or agree to a settlement. For example, private student loan lenders often won't settle your debt without proof of significant financial hardship. 

If creditors think you can pay back the full amount, they have no reason to accept less. 

IRS tax debt is a special case. The government expects you to pay what you owe and provides a few ways (like installment plans) to help you. If you can demonstrate a genuine hardship, however, you may be able to settle your debt for less with the Offer in Compromise program. The IRS will typically accept less than you owe only if it believes that what you offer is as much as it's likely to collect within a reasonable timeframe. 

These Debts Can't Be Settled

You can't usually settle secured accounts or government-backed debt. This might include:

• Mortgages

• Car loans

• Federal student loans

• Child support 

• Alimony

• Some legal fines and penalties, including restitution for crimes or penalties for fraud

If you owe money for these things, you'll probably have to repay the full amount you owe. That doesn't mean creditors won't help at all—many have workout plans, loan modification options, and other assistance. But you're very unlikely to succeed by simply offering less and hoping for debt forgiveness.

Why Some Debts Don't Qualify for Settlement

There are various reasons that certain debts don't qualify for settlement. 

Mortgages and car loans generally can't be settled because they're secured debt. When you took out these loans, you pledged the asset guaranteeing the loan (the house or the car). That gave the lender the legal right to take the asset if you stop paying.

In other words, the lender can take your collateral, sell it, and use the proceeds to cover your debt. There's little reason for them to accept anything less than the total you owe.

Some other debts are also given special protection under the law because they are considered important for society. Federal student loans and child support payments are good examples. 

Finally, some creditors have a business policy of not settling debt. If that's the case—or if you and the creditor can't agree on a settlement—you won't be able to settle the debt even if the account is unsecured.

How to Decide Whether to Settle Your Debt

If you are trying to decide whether to settle your debt, there are a few key things to think about:

• Can you make your minimum payments? Typically, lenders won't settle as long as your account is current. But if you stop making minimum payments, this could hurt your credit score and lead to collections efforts. If you can afford your debts, debt settlement likely isn't the best move. If you're already behind, though, it's worth considering.

• Have you explored all your options? If you're not behind on your payments and your credit is fair to good, you likely have more options than you think. Alternatives like credit card counseling or debt consolidation may be all you need. A solid repayment plan or interest rate reduction could help you manage your debt and repay what you owe without debt settlement.

• Is your debt eligible for settlement? If most of what you owe is debt that can't be settled, like an auto loan or federal student loans, then settlement may not be an option. However, if you also owe eligible unsecured debts, like credit cards, you could potentially settle some of your debts. This could open up room in your budget for other debts that can't be settled.

If you're not sure what to do, talking with a professional debt settlement company like Freedom Debt Relief could help you decide if settling debt makes sense for your situation.