- Debt settlement is the practice of allowing a consumer to pay a portion of a debt, usually less than 50 percent of the total. The creditor reports the debt as settled, with a zero balance.
- You can negotiate your own settlement, but creditors likely won't talk to you until you are several months behind in your payments. Of course, by that time late fees and other charges have accrued, putting you deeper in debt. Debt management companies or attorneys can also negotiate for you.
- Debt management companies can charge thousands of dollars, and there are many unscrupulous companies that will take your money without doing what they promise to do on your behalf. Also, if a creditor learns that you are working with a debt management company, the creditor may decide to sue you for the entire amount. If that happens, the debt manager will drop you.
- While it gets you out of debt, settlement can also result in a negative mark on your credit scores.
- The money you save through a settlement could be taxable as income. It's best to check with your accountant.
