How Does Debt Settlement Work?

The goal of a debt settlement company is to convince lenders that you are unable to pay the full amount of your loan and offer them a lump-sum payment instead. In order to build up this lump-sum, you’ll establish a savings account with the debt settlement company and make deposits for a predetermined period of time.

Once you’ve built up enough of a lump sum, the debt settlement company will then reach out to creditors and start negotiations on your behalf. If they succeed, they’ll convince a creditor to “settle” your debt by accepting a lump-sum payment that is smaller than what you would owe otherwise.

Is Debt Settlement A Good Idea?

For many consumers, the answer is yes. According to the American Fair Credit Council: “On average, debt settlement saves consumers $2.64 for every $1 in fees paid.”

If you have multiple loans and are struggling to manage all of the accounts, make payments, or balance high interest rates, debt settlement can be a good way to simplify or reduce financial burdens.

To understand whether a particular debt settlement company is right for you, see if they offer a free consultation. You’ll want to prepare for each consultation—have a list of your current debts, including the name of the lender, the total amount you owe, the interest rate, and the minimum payment due each month. This process will allow you to compare what your current debt burden is to what it would be under the new plan.

Secured vs. Unsecured Debts

Debt settlement companies typically only work with unsecured debts (like medical bills, personal loans and credit cards). Secured debts—those backed by collateral, like car loans and home mortgages—can sometimes qualify for debt consolidation strategies but generally won’t qualify for debt settlement strategies.