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It’s easy (and often fun) to get into debt, but it can be painfully difficult to get back out. It can take just a few months to create tens of thousands of dollars in debt, but it may take decades to pay off that debt.

Everyone who pays off their debt does it a different way. They often combine strategies to chip away at their debt, and they stick with those strategies until the debt is gone.

A debt settlement refers to an agreement reached between a creditor and a borrower in which a reduced payment from the borrower is regarded as full payment. In other words, a debt settlement is a debt reduction agreement reached between a creditor and borrower.

Debt settlement is a service offered by third-party companies that try to reduce your debt by negotiating settlements with your creditors or debt collectors. But there are risks involved.
Although it may be tempting to use a debt settlement service to reduce your debt, it’s important to keep in mind that you could end up deeper in debt or with a negative impact to your credit.


Debt settlement companies may also be known as “debt relief” or “debt adjusting” companies. The companies generally offer to contact your creditors on your behalf, so they can negotiate a better payment plan or settle or reduce your debt. They typically charge a fee, often a percentage of the amount you’d save on the settled debt.

The company may try to negotiate with your creditor for a lump-sum payment that’s less than the amount that you owe. While they’re negotiating, they may require you to make regular deposits into an account that’s under your control but is administered by an independent third-party. You use this account to save money toward that lump payment.

While they negotiate, the debt settlement company may also advise you to stop paying your creditors until a debt settlement agreement is reached.

Once the debt settlement company and your creditors reach an agreement — at a minimum, changing the terms of at least one of your debts — you must agree to the agreement and make at least one payment to the creditor or debt collector for the settled amount. And then the debt settlement company can begin charging you fees for its services.

The benefits

Settling a debt through a debt settlement company could …

  • Lower your debt amount
  • Help you avoid bankruptcy
  • Get creditors and collectors off your back

To qualify, you must have at least $7,500 in unsecured debt.
If the company successfully negotiates a debt settlement for you, it typically charges a fee of 15% to 25% of your total debt. Fees may vary based on where you live.

Offloading all or a portion of your personal debt via settlement can seem like a daunting task when you feel like you’re in over your head with debt. But one of the great truths in business is that everything is negotiable. Even when the price or terms of something seem set in stone, getting a discount is often as easy as knowing whom to ask and how to ask for it.

When it comes to the balances you owe on your credit cards, for example, there might be an opportunity to negotiate what you actually owe. With a little bit of knowledge and guts, you can sometimes cut your balances by as much as 50% to 70%. While the possibility of negotiating a settlement should encourage everyone to try, there’s a good chance you’ll hear a “no” somewhere along the way. If so, don’t just hang up the phone and walk away. Instead, ask your credit card company if it can lower your card’s annual percentage rate (APR), reduce your monthly payment, or provide an alternative payment plan. Often your credit card’s debt settlement representative will feel bad for having had to reject your offer and may be willing to agree to one of these other options.

Finally, another strategy to consider, especially if you owe a lot across several credit cards, is debt consolidation.


Kudosware is a tech consulting firm. After 5 years in the industry, we decided to alter direction and now we share our passion by helping others.

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