settle debt

Settle Debt – Pay a Fraction of What You Owe Through Debt Settlement

What if I told you it is possible to get out of debt for as little as 25 cents for every dollar you owe?

If you are having financial trouble due to high levels of credit card debt, or other forms of unsecured debt, than you may want to settle your debt with creditors. You may be able to obtain a discounted debt settlement agreement that allows you to pay off the debt owed at a fraction of what you owe. This debt solution can be just what you need to overcome your financial hardship.

Understanding Debt Settlement

Debt Settlement is a form of debt relief in which the borrower attempts to negotiate a reduced debt from a creditor. Typically this debt solution only works with unsecured debt such as credit card accounts or personal loans. Consumers will often try to settle debt to avoid bankruptcy.

Debt Settlement Agreement

A debt settlement agreement must be approved by both the lender and the borrower.

As this would imply all that is needed for a person overwhelmed with consumer credit card debt is a means to contact the lender as well as a lender willing to settle.

How Does Debt Settlement Work?

The concept of debt settlement put plainly is found in the following example; A lender loaned a borrower a high interest high risk loan with no secured asset as collateral. The borrower has perhaps incurred a financial hardship and can not make the necessary payments needed to meet the financial obligations of the loan agreement. The bottom line is that the borrower feels it is not in their interest and or ability to pay the lender’s claim of money owed.

Instead of sticking to the current debt agreement, a settlement or compromise is agreed upon. This is usually a lump sum payment that the lender agrees to accept as full payment for all financial obligations they originally were due.

The philosophy behind agreeing to take a loss stems from the lender’s belief that the borrower will not pay what is currently owed. Thus the lender believes that they can cut their losses by taking the large lump sum payment and foregoing the right to collect any other debt. All other debt is forgiven.

The Key Ingredients to Settle Debt

There is no stone tablet that outlines the exact necessities or correct manner to settle a debt with one or all of your creditors. There is no golden formula that must be met.

There are some fundamental laws of finance that have carved out a typical recipe for debt settlement. Well… at least there are some cornerstone ingredients that show up time after time.

What is Needed to Settle Debt


You need cash to settle debt. The reason that you may be able to negotiate a 80% – 40% discount from the amount that you owe your creditor is the enticing offer of a one time lump sum payment that is paid immediately upon the settlement agreement.

That cash is huge. Every business depends on cash flow and your lender is no different. They may be taking a loss on the books by accepting a settlement offer but they will sure get a bit more cash flow in the short-term than what they would have typically expected from your account. Even more enticing, when you consider that you were not even paying on the account for some time.

Though this all works for your cause you will still; need the cash, and you will need it when the settlement agreement is signed.

You will need 1 – 3 years worth of minimum payments in cash to hand over to the lender depending on what percentage your minimums were.

This means that you will need about 20% – 60% of what you owe; total.

This is why those months where you simply don’t make payments are so important. You need to save like you never saved before.


Time is an extremely important aspect of obtaining a settlement agreement from your lender. First off as mentioned above you will most likely need some time to scrape together a small fortune to offer your lender. Plus your lender wont settle loans that are being paid on time. you will have to go in default and show the lender these monthly payments and the overall loan agreement will not bee honored.

Also you will find that once you start receiving settlement offers from your lender. As time passes they start becoming better and better with more favorable terms.

Time may be sounding like a nice ingredient all of a sudden. Well, not so fast.

See the first year at this game is going to be miserable. Debt collectors will hound you. Lawyers will call you. Subpoenas will appear on front doors. Judgments will be reached against you.

In fact the only reason why 13 months on may not seem all that bad is because that first year was utter torture.

You will still have terrible credit scores and reports. You will lose access to credit accounts and your credit card balance will be way higher than you remembered after that first year. Stick with it however and you should find that in time all that changes. First the balance owed, than slowly but surely your credit situation will start to turn around.

Plan Commitment

This is not a light-hearted financial decision. if you are going to try to settle debts with your creditor than you need a plan and you need to commit to the process. You must play your part. No matter how much or how little that apart may be. If you attempt the settlement on your own, or if you recruit help, You need to stick with and support the plan and your team..

Be careful, think everything through. but once you pull the trigger you are now considered “Charlie” to those on the other side of enemy lines.

Financial Hardship

Though not technically relevant it is important that you have a reason for attempting to settle debt with your creditors. They will not respond kindly to “well my brother settled his debt and I want to settle mine too”

If you can pay, well… than maybe you should pay!

Have a clear and documentaries financial hardship and the root catalyst for your need to settle these debts.

Debt Settlement Process

This is a road and generalized summary of a hypothetical debt settlement process that a typical consumer may experience during their efforts to obtain a debt settlement agreement. This scenario is based on a typical unsecured consumer debt obligations.

All consumers who attempt to settle debt with a lender will have a unique experience. This debt management resource was created to add some perspective to consumers who are considering debt settlement options. As a consumer only you have the power and responsibility to ultimately decide the actions and decisions that are best for your own unique situation.

Please know that the debt settlement process demands a firm commitment to follow through. We believe that one should use debt settlement as a stepping stone towards financial freedom.

General Debt Settlement Process Outline

  1. First Comes Default – Usually a borrower is in default when a settlement agreement is reached, but not always. There is no law or rule stating the borrower must be in default. However using some simple logic you may deduce that if a borrower is paying on time then the lender may not want to take a loss voluntarily. The borrower often decides to either stop paying, or can not meet the monthly payments that are due to the lender. This may happen before the decision to pursue debt settlement or it may happen after such a decision.
  2. Next Start Cash Payments into the Settlement Fund – The borrower needs to be able to offer a settlement in the form of a cash sum payment to the lender. As a safety net figure the borrower should aim for 70% of what is owed over 8 – 18 months. This may seem like a lot. However this amount really is not necessary in most cases you can often get amounts that range from 25% to 45% of the original balance.
  3. Debt Collection Tactics – Then the lender hits the borrower with debt collection tactics and penalties

    At this point the lender goes into defensive mode and will most likely start charging an additional monthly fee and a higher interest rate on the balance which will continue for several months at least.

    Also past due notices will be sent by mail, email, and phone. As time goes on debt collectors will get involved and will bombard the borrower with what are almost always overwhelming amounts of phone calls unless the lender or rather debt collector is legally restrained some how.

    Even unlawful debt collection attempts are fairly common amongst the collection operations. Most lenders play dirty one way or another and they do so very well.

  4. Debt is Sold to Debt Collector – After 9 months the debt must be charged off and is generally sold for a steep discount to debt collectors whom then try to collect as much as they can from the borrower.

  5. Debt Settlement Negotiations and or Offer – By now there should have been a settlement offered by either lender, debt collector, and or the borrower. The offer is sometimes renegotiated by the lender or borrower. Sometimes a lawyer, debt management counselor, or debt settlement firm may be involved on the behalf of the borrower.

  6. Judgment – Legal Actions take place. Many times the lender or debt collector will attempt to obtain a judgment of some sort against the borrower for the debt owed. This can possibly lead to wage banishment though this is not the normal or typical outcome. A deficiency judgment is often awarded to the lender against the debtor.

  7. Debt Settlement Agreement – With any luck the consumer and lender will come to an agreed debt settlement. The settlement proposal will be signed by both borrower and lender. The borrower must make the payments for the agreement to be final.

Key Factors and Considerations to Contemplate Before You Try to Settle Debt

Debt settlement may be the debt help you need if you are struggling with an overwhelming amount of unsecured debt. It is one of the most beneficial debt solutions available to the modern-day consumer.

The notion that you may only have to pay .20 – .50 cents on every dollar that you owe your credit card account creditors is an attractive thought at the very least.

Before you get to excited and carried away with the benefits of debt settlement there are some serious factors to consider before pursuing a settlement agreement with your creditors.

I made a list of key concepts and factors that you should consider before attempting debt settlement.

Before You Settle Debt Consider This

Do You Need to Settle Your Debt?

  • Just because you would like to only pay a fraction of the current debt hanging over your head does not mean that you need to settle your debt with your creditors.
  • Be sure that you are not jumping to extremes and being persuaded by the alluring thought of saving 40 – 80 percent of what you owe on all those high interest credit card accounts.
  • Often you may find that a commitment to a sound debt management plan including a rigid credit card pay off plan coupled with a closer look at the monthly budget may do the trick. This can save your credit and prevent ripples of consequences that debt settlement can cause.

Settlement Alternatives

  • You really need to consider the alternatives to debt settlement. If you are in real trouble and need to find some debt solution that will provide debt relief, make sure that you take a look at all the options.
  • For instance there is always bankruptcy.
  • Asking a rich uncle for a loan.
  • Than there is also debt consolidation depending on your circumstances.
  • Many folks have valuable assets that they may be able to sell and use the proceeds as an alternative to negotiating a settlement with creditors.

Do You Have What Debt Settlement Takes?

  • Debt Settlement is no easy task. In fact even a smooth and successful debt settlement campaign is no picnic.
  • Your creditors were not born yesterday and chances are they know a bit more about this kind of stuff than you do. On top of that they have a game plan that they practice and utilize on an everyday basis to get the upper hand in any sort of debt settlement negotiations or applicable scenario. You are out gunned; make no mistake about that.
  • Many folks who attempt to settle debt call with an offer before they are even late. This is flat-out silly. The answer will be NO.
  • At the very earliest you will have to wait at least 90 days after your first missed payment before they will even glance at a settlement offer. Even than you are going to be hard pressed to get anything through that most would have in mind.
  • Don’t forget that the entire time that your account is delinquent they will be racking up charges left and right.
  • Your interest rates will go up, you will be charged late fees and other charges that you have never even heard of.
  • The typical credit card company will have every intention of doubling your balance by the time all the crazy fees and interest come to a halt.

You Need Serious Cash to Settle Debt.

  • One of the hardest aspects of obtaining a successful debt settlement offer is having the means to pay of a large chunk of your balance in one swoop.For example let’s say that you owe 50,000, which was about 35,000 – 40,000 when you first started 6 – 18 months ago, You will need 15,000 – 20,000 dollars in cash to settle that debt in most cases.

Super Stressful for Years?

  • You may have noticed that we quoted you a time frame of 6 – 18 months from when you decided to settle your debt and when it was actually time to respond to an offer or pay on an offer to settle debt. Such a scenario is pretty timely and optimistic. It can often take longer. This period of time can be quite stressful because you will be hounded by debt collectors left and right.
  • You will be told a million and one different things from a million and one different parties. Most if not all of them will be lying some sort of fashion. Your life will become stressful.
  • During this time however you will no longer have to be paying those credit card bills and can use the time to save.

Will You Do the Negotiation Work?

  • You have to find an outlet of communication to negotiate. Many if not most debt collectors that you will encounter are just entry-level folks with no real authority.
  • Typically the best you will get is a reliable address to send offers that may get to a desk with eyes that care and that can make a decision.
  • Loss mitigation operations have become streamlined by protocol and policy. There is not much of the process that is not automated on your lender’s end.

Debt Settlement Has Consequences

  • Make sure you are aware of the downsides to debt settlement. even a successful debt settlement agreement will have ripples of consequences. you will owe money on the debt forgiven most of the time because your lender will write it off and the government considers that amount to be the same as income. So you will pay a considerable portion to taxes.
  • Your credit will be ruined for at least half a decade. Creditors will see that you defaulted on your credit accounts and they will also see that you settled the debt for less than what was owed. Not a promising trait for a potential investment.
  • These records stay on your credit report for seven years.

You Could Lose

  • It is extremely important that you realize that you may not be successful at obtaining settlement agreement with all or any of your creditors. This can put folks in quite a pickle.
  • You can find yourself in a considerably worse situation than you started. Owe more money, have less access to credit, have no credit, and you may just feel like you spent a few years on the front lines for the privilege.

Value in Debt Settlement

We wanted to be sure to really drive home the strong points for consideration when it comes to debt settlement. There are some real risks involved. That being said there is some true life changing value in settling your debts with those pesky creditors. You can save years worth of income by reaching a settlement agreement. The truth of the matter is that though obtaining a debt settlement agreement is a grueling process that you must really stick with, in the end, the lender will almost always offer you a settlement agreement. They will try to call your bluff and intimidate you in to paying for quite some time, however at some point they will start sending you offers and the longer you wait the better they become.

Benefits of a Successful Debt Settlement

The benefits of debt settlement for a consumer who has experienced financial hardship, and has become overwhelmed by debt expenses, are significant. A debt settlement can be the debt solution and catalyst that allows a consumer to get back on track (with the aid of a healthy and financially fit budgeting guide) towards a future of financial freedom.

Consumer Benefits of Debt Settlement:

  1. Large Reduction in Principle
  2. Large Reduction in Debt
  3. Improvement in Debt to Income Ratios
  4. Interest and other Debt Expenses Reduced or Eliminated for Consumer

Consumer Risks of Debt Settlement

Though the consumer can obtain some wonderful and perhaps even essential benefits and savings through debt settlement there are some real and significant consequences and risks that can hurt the consumer who attempts to settle debt.

Downside to Debt Settlement

  1. The lender denies or does not approve a settlement
  2. Large Reduction in Credit Score
  3. Legal Consequences
  4. Other Credit Card Accounts Negatively Affected

Debt Settlement Help

Obtaining help with settlement negotiations and processing is a common want amongst those consumers in need of debt help. Consumers can find help through many outlets.

Recently the debt settlement industry has gone through a change that has come in the shape of government regulations. These regulations are the new FTC debt settlement laws. If you are a consumer looking in to obtaining the assistance of a third-party to help negotiate a debt settlement than you will want to become familiar with the new regulatory actions.

Credit Card Debt Settlement Help Sources

  • Non-Profit Debt Management Services and Counseling
  • Debt Settlement Firms
  • Your Local Church
  • Informative Debt Help Resources (like this finance blog)
  • DIY Debt Settlement Programs
  • Debt Settlement Lawyers
  • Hire a Private Contractor as a Negotiator

Many consumers have been known to hire debt settlement firms and or debt settlement lawyers or debt settlement counseling agencies or even a friend better suited to do so.

Hiring debt settlement help in theory is a make sense strategy for the average credit card debt consumer who has experienced a financial hardship. Just as you may have an accountant help with tax preparation, a lawyer help with a messy divorce, or a mechanic with a transmission repair you may feel more comfortable with an attorney, counselor, and or negotiator who will negotiate on your behalf with your interests in mind.


Well… there seems to be some controversy amidst this line of thought.

Regulating authorities such as the FTC have spoken out many time about the unfair practices of the debt settlement industry and has created laws to help protect consumers against these companies.

FTC Debt Settlement Laws

New FTC Regulations for Debt Settlement Companies as of 2010.

The new FTC debt settlement laws and regulations are an attempt to protect consumers from debt settlement scams. These laws prevent settlement companies from charging upfront fees.

This is similar to the legislative development preventing loan modification companies from taking upfront fees.

Effect on Debt Settlement

The bankruptcy alternative known as debt settlement will take a different shape which will be carved by the FTC’s new consumer protective measures.

These laws will create a higher barrier to entry for the debt settlement industry. As always, there will be more fine print. The price and expense of debt settlement will increase noticeably.

Debt settlement services should get better… we hope.

From the best that I can tell this is only for debt settlement companies and not for debt management services or credit counseling service. Debt consolidation involves getting a loan so that should not be affected either. As we determine the other effects that these FTC regulations have on other forms of debt solutions we will report those findings (if any) accordingly.

Overall I think that this new legislation will do as it is supposed to do and weed out the debt settlement scammers. There will be a cost increase to the consumer because of the increased risk that will be taken on by the “debt settlement firm” but overall that cost, if contained, should be well worth it.

The quality of debt help available to consumers should improve.

There are 3 key implications of the new consumer protection laws that will affect how debt settlement companies can do business.

Three FTC Debt Settlement Regulations

  1. No Upfront Fees – Debt settlement companies will no longer be able to collect upfront fees for debt settlement services. This use to be a standard practice. Under the new laws the settlement companies will have to at least settle, renegotiate, reduce, or somehow eliminate at least one of the consumer’s debts. After one of the debts has been “serviced” successfully the settlement company may charge the consumer or client for the company’s services. Though this law at first made me a little uneasy because of the speed of which the FTC took action on such a restriction (obviously it is a little risky to extend credit to the consumer of debt settlement services) after reviewing and contemplating this portion of the new regulation I believe that overall this law will be helpful to the consumers, the industry as a whole, and lenders.
  2. Settlement Funding Accounts – Dedicated accounts must be established at a “real bank” and must be in the name and control of the consumer. The debt settlement company may not have access to the funds. Many debt settlement programs involve a dedicated account that is used to accumulate funds for the settlement arrangements. I think that the establishment of a real bank account that has FDIC insurance is a spectacular idea. The rest of it makes me cringe a bit. I think that though the consumer should be able to access the funds through some process and that the account should reflect the consumer as the ultimate owner, we believe there needs to be some restrictive elements that mirrors the commitment of the consumer (or client) to the process of settling their debt. Just as consumers have restrictions to a retirement account reflecting the commitment of long-term savings, following that logic, consumers should have restrictions to a settlement account. I also think that if we are asking debt settlement companies to go on a limb and have faith in the consumer, then so to should the consumer do so on the behalf of the debt settlement company. Imagine a consumer signing up with a settlement company, funding their account for 3 – 5 months, and then decides that they need to spend that money on something else. Meanwhile a marketer or advertiser has generated a sales lead that signed up, an agent has spent time signing up the consumer, an administrative assistant of some sort has created an account, bank account, filed paperwork for internal purposes, as well as with the creditors of that consumer, and a negotiator has done whatever portion of negotiations or taken part in whatever correspondence with the creditors. If the consumer pulls out before they get the time to get that first offer then that settlement company is left hanging.
  3. Disclosure of RISK – Debt settlement firms will have to disclose all the risks or potential negative effects of debt settlement. I think this is wonderful.

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