Debt Settlement and Negotiation as a Debt Relief Option

Key Takeaways
  • Debt settlement provides a legal route to eliminate debt without paying the full amount you owe.
  • You can only include unsecured debts like credit card bills, medical debt, or personal loans in a debt settlement program.
  • All debt-relief programs have a negative impact on your credit. However, the decline is short-lived and temporary because the lower monthly payments increase your ability to remain current on other credit accounts while in the program.

Financial hardships don’t all come in the same form. Forced early retirement, age discrimination, and health can all influence your continuation in the workforce. Instead of a job loss, you may face underemployment or the need to take time off to care for a loved one. 

Whatever the case may be, changes in your employment can directly impact your ability to pay existing debts. 

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What is Debt Settlement?

Debt settlement provides a legal option to eliminate debts by agreeing to settle the account and pay less than the full balance owed. Once you have completed all the required payments under the terms of the settlement, the creditor will permanently close the account and report it on your credit file as “Settled in Full.” You then have no further obligation to make any payments on the account.  

It is possible to become debt free in less than four years through negotiated settlements on your outstanding balances. The payoff schedule will depend on the amounts you owe and how much you contribute each month.

Granting Legal Authority to Negotiate on Your Behalf

Upon entering a debt settlement program, you will grant a power of attorney to the company managing the negotiation of your debt.  This legal authorization grants them the authority to speak with creditors on your behalf and work to negotiate a payoff or term payment plan to satisfy the outstanding balances on your accounts for less than the full amount owed.  

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Rather than continuing to make monthly minimum payments, you will direct payments to a trust or special purpose savings account where the funds will grow each month.  Over time, this increasing balance will provide the means for your debt settlement company to negotiate on your behalf to the reduce or eliminate the amount you owe on the account.

In most cases, debt collection calls stop, because creditors begin working with the company rather than calling you. 

Creating a Dedicated Trust Account or Special Purpose Savings Account

Debt settlement companies cannot hold customer payments directly. Therefore, upon enrolling in a program, a specialized bank account is established to hold the funds you contribute each month. Once a settlement agreement has been reached on one of your accounts, you authorize the release of those funds to pay the debt. 

The Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) mandated the use of these accounts in 2010 as part of sweeping regulation, which now govern all debt relief providers and specifically the practice of Debt Settlement.  

The use of these accounts provides an additional layer of protection, ensuring you retain control of, access to, and ownership of all funds held in these accounts. Furthermore, you must approve the disbursement of these funds to creditors, along with any fees charged by the debt settlement company. 

Regulatory Oversight

The practice of Debt Collection and Debt Settlement are both regulated by the (FTC) and the (CFPB). 

Indirectly, the Office of the Comptroller of Currency (OCC) regulates many banking practices. These policies include debt settlement as it relates to the terms of account aging, account charge-off, and the length of time and the number of payments credit card issuing banks can accept.   

Generally, a short-term settlement plan to close the account for less than the full amount on a delinquent account that has yet to reach default or Charge-off can be no longer than 93 days. A long-term repayment plan, such as the ones set up under a credit counseling program may last up to 60 months, but usually, involve paying back the full amount of the debt plus some interest.

Terms and Concessions Will Differ Across Creditors

Credit card companies have defined parameters for accepting settlements on accounts enrolled in debt settlement or negotiation programs, which differs by individual creditors, debt buyers or collection agencies. Most of these companies will work with debt settlement companies, although there are a few that may not. Those that do, typically have dedicated teams and defined settlement guidelines to work with distressed consumers enrolled in these programs and are familiar with the process of negotiating with a 3rd party on behalf of their common customer.  This process is generally non-adversarial and mutually beneficial to all parties concerned; creditor/collector, consumer and debt settlement company.

What Types of Debt Qualifies?

Debt negotiation companies work exclusively with unsecured debts and can include the following:

  • Credit card accounts
  • Auto deficiency loans
  • Broken leases
  • Personal loans
  • Some business debts with personal guarantees
  • Peer-to-peer loans

You choose the accounts you want to enroll in the program. Those accounts you enroll will be closed and usually become delinquent as you shift making monthly payments on these accounts to focus on building up a savings balance in your trust account.

Impact of Debt Negotiation on Credit

Late payments will initially lower your credit score, and late payments remain on your file for up to seven years. Over time, your credit score improves, provided you make on-time payments on any remaining debts. The FICO 9 scoring model no longer considers accounts previously in collection one they have paid in full or settled.  So, as you settle you accounts and make all your agreed upon payments on time, these accounts are longer considered as part of your credit score calculation and your credit may improve quicker. 


A debt settlement program is best suited for people who have heavy debt loads and experience a financial hardship that results in missed payments. A Debt Settlement program may also be an effective way to lower monthly payments while reducing your overall debt faster if you have recently experienced a reduction of income and are unable to pay all your bills each month. A debt settlement program can help you avoid bankruptcy and allow you to recover your credit score quicker.  And finally, unlike credit counseling, a debt settlement program only requires you to pay back a portion of the debt, potentially saving you thousands of dollars and reducing your debts years quicker.

  • How does debt settlement work?

     When you sign-up for debt settlement, you partner with a professional company that works with creditors to negotiate debt payoffs. A creditor typically requires a lump sum payment to settle the debt.

  • How does debt settlement impact my credit?

     Like all debt-relief options, your credit score will decline initially and then improve as you pay the creditor accounts off. The most significant impact occurs in the first 12 months. 

  • How does debt settlement offer relief from credit card debt?

    High levels of credit card debt, charging you 15% to 30% in interest, make it difficult to pay off the debt because so much of the payment goes to interest. Debt settlement allows you to pay less than the full balance owed to get rid of stubborn debt.

  • Is it bad to settle my debts?

     Missing a payment on any debt has the same result…a lower credit score. However, if you have already missed payments, or struggle to keep up with your existing debt balances, a late payment here and there is an inevitability. Debt settlement provides a coordinated plan to eliminate your debts and get you out of the debt cycle.