1. DEBT SOLUTIONS

How Much Debt Can Be Forgiven With Debt Settlement?

How much debt can be forgiven with debt settlement
BY Kimberly Rotter
Jun 19, 2024
Key Takeaways:
  • Not all debt is negotiable.
  • Creditors tend to be more willing to negotiate when you have a genuine need.
  • Some people have had very good results with debt settlement.

Life happens, and it’s possible to end up with debt you intended to repay, but can’t. There is a way you could reduce what you owe, and get rid of the debt cloud hanging over you. 

Debt settlement has helped many people regain their financial footing. It can be a lifeline to a brighter, less-stressful financial future.

You may wonder whether creditors are willing to reduce debts—and if so, by how much. Creditors do negotiate, especially with people experiencing financial hardship. But there’s no such thing as a get-out-of-debt-free card. 

Let’s take a closer look.

What is debt settlement?

In a nutshell, debt settlement involves negotiating with your creditors, asking them to accept less than the full amount you owe and forgive the rest. They usually won’t forgive the entire debt, but they may be willing to reduce it if you’re experiencing a financial hardship. Forgiving a portion of the debt could cost them less than suing you, and from the creditor’s perspective, getting something is better than getting nothing.

How much debt can be forgiven? The factors at play

There's no standard percentage or amount when it comes to debt settlement, but here are the factors that influence the amount you might save:

  • How much you owe: Generally, higher balances may have more room for negotiation.

  • Your financial situation: Creditors are typically more likely to negotiate if they believe you genuinely can't afford to pay back the full amount.

  • The creditor's policies: Some creditors are more open to settlement than others. 

  • Your negotiation skills: A skilled, determined negotiator (whether it's you or a professional) can make a big difference.

Real-world examples of debt settlement

  • Reddit user Equal_Friendship_434 shared that they settled a debt for 30% of what they owed.

  • Reddit user lastbet05 shared that they settled a debt for 27% of what they owed.

  • MyFICO user crrredit shared that they settled a debt for 10% of what they owed.

These aren’t Freedom Debt Relief customers and we didn’t confirm those results.

Set realistic expectations

It’s possible to significantly reduce your debt through negotation, but it's important to be realistic.

Not all debt is negotiable. For example, child support and most student loans are ineligible for settlement. 

Debt settlement has a negative impact on your credit score. How much impact depends on your situation and what credit score you started with. 

On your credit reports, debts reported as “settled” are considered less favorable than debts “paid as agreed.” However, settled debts are better than open collection accounts.

Some people stop making payments so they can save money to negotiate with. If you miss debt payments, that’s likely to have a serious negative impact on your credit. If you have great credit when you fall behind or settle a debt, your score could take a big hit. Many people who qualify for debt resolution are already behind, though, and debt settlement may prevent worse damage.

Settling debts could result in denials when you apply for credit in the future, depending on the creditor’s policy.

Settled debt may have other costs. Besides the portion of the debt you need to pay, you might incur other costs when you settle debts. The forgiven debt is reported as taxable income. Not everyone has to pay income taxes on settled debts, but you might, so consult with a tax professional before making any decisions about settling debts. Also, if you work with a professional debt settlement company, you pay a fee for each debt they successfully negotiate.

Getting out of debt takes time and patience. Debt settlement isn’t a quick fix. The negotiation process can be lengthy and stressful.

Steps to take if you're considering debt settlement

  1. Assess your debt situation. Make a list of all your debts, including amounts, interest rates, and creditors.

  2. Research your creditors. Find out their policies on debt settlement. You might have to do some digging. Try user forums like Reddit, where you can search for other people’s experiences with the same creditors.

  3. Consider professional help. A reputable debt settlement company can guide you through the process and negotiate for you. Before you agree to work with anyone, check the Better Business Bureau and TrustPilot for information and reviews. Learn about the red flags for debt relief scams by reading the Federal Trade Commission’s website.

  4. Prepare to negotiate. Gather documentation about your financial situation and the cause of your hardship. Be ready to explain your situation.

  5. Persevere. It takes time to negotiate, and time to pay off your negotiated debts. It helps to give yourself reminders of the end goal and your reasons for wanting to be free of your debts.

Is debt settlement right for you?

Debt settlement isn't a magic wand. It’s not right for everyone. But if you're struggling with overwhelming debt and you've explored other options, it might be worth considering. The key is to go in with open eyes, realistic expectations, and a plan.

Insights into debt relief demographics

We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during June 2024. The data provides insights about key characteristics of debt relief seekers.

Credit card balances by age group for those seeking debt relief

How do credit card balances vary across different age groups? In June 2024, people seeking debt relief showed the following trends in their open credit card tradelines and average credit card balances:

  • Ages 18-25: Average balance of $7,378 with a monthly payment of $209

  • Ages 26-35: Average balance of $10,797 with a monthly payment of $300

  • Ages 36-50: Average balance of $14,340 with a monthly payment of $405

  • Ages 51-65: Average balance of $14,364 with a monthly payment of $420

  • Ages 65+: Average balance of $14,837 with a monthly payment of $397

These figures show that credit card debt can affect anyone, regardless of age. Whether you're just starting out or nearing retirement, managing credit card debt can be challenging.

Tackle Financial Challenges

Don’t let debt overwhelm you. Learn more about debt relief options. They can help you tackle your financial challenges. This is true whether you have high credit card balances or many tradelines. Start your path to recovery with the first step.

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