How Debt Settlement Works

Debt settlement is a procedure where you ask to pay a less amount of money you owe to your creditors.

This is a bad situation, but it may happen sometimes in life. Let’s put it this way.

You decide to purchase a brand new car, but you lose your occupation and then your primary source of income. At this point, you can’t afford to pay off your creditors. With debt settlement, you negotiate with your creditors (or with a debt settlement company – click here┬áto find out more) to reduce the amount of your debt.

Of course, this is a solution you want to choose only if you don’t have any other ways to pay off your debts, because debt settlement has many downsides, included to actually influence negatively your credit score.


How Debt Settlement Works

The debt settlement procedure may start in 2 ways:

  • directly with your creditors;
  • through an agency.

Remember: if you don’t make payments for your debts for more than 6 months, your position can be sold to a collections agency. In this case, your creditors get a small amount in percentage of the total of your debts, and at this point, you are going to deal just with the collections agency.



Dealing With Your Creditors

In case of negotiation with your creditors, the most important point is to convince them the best thing to do is to settle your account.

Now, you need to analyze your budget and find out how much money you can actually give back to your creditors.

Of course they will want the full amount back, but you need to explain that you can’t do that.

You want to end up with a sum you can afford to pay, while your creditors are going to accept it (also because, at this point, they know it’s better for them to have something back, instead of nothing).



Dealing with a Debt Collection Agency

As previously mentioned, if you find yourself not paying anything of your debts for more than 6 months, your creditor can decide to sell your position to a third party.

The creditor will be no longer involved and you are just going to deal with the collection agency (they will end up purchasing your debt for less than it’s worth).

Take the following example. You have $20,000 of credit card debt. Your creditor may sell it for, let’s say, $5,000 (or less). So the debt collection agency pays just that amount and anything they can get from you more than $5,000 is a profit for them. Of course, by law, they can request up to the total of the debt, but since they paid less, they will generally agree a much lower amount.

Normally, this is around 40-50% of the total debt.


No matter what you decide to do, just remember that debt settlement is a procedure that has a lot of downsides, including your future ability to borrow money (which can be severely damaged).

Use this procedure only in case of absolute emergency.




Featured image link