Loan Articles


Debt settlement refers to a legal process through which creditors agree to accept less money than the borrower owes them. Debts that can be settled include unsecured business credit cards and lines of credit, unsecured loans and personal lines of credit, collections, medical bills, credit cards, and cars in repossession.

The first benefit of debt settlement is that the borrower avoids filing for bankruptcy and keeps all of his assets. In this sense, the settlement comes with a certain amount of relief and the debtor gets a chance to make a fresh start. Unlike bankruptcy which damages the borrower’s credit report in the long term, the settlement procedure takes between one and three years and the borrower is debt-free. If the borrower is able to secure a lump sum and pay off the creditor, debt settlement is one of the quickest ways to eliminate debt.

An obvious advantage of debt settlement is that the borrower saves money. Depending on the amount of debt and the willingness of the borrower to negotiate, the borrower may save thousands of dollars. It is not uncommon to settle for half or less than half of your outstanding balance. If you have money to settle, you may consider it financial gain.

Debt collection is what most borrowers work hard to avoid. Debt collectors keep calling and try to collect the debts you owe them. Sometimes they may call you a couple of times a day. The worst part is that debt collectors may even file a law suit against you. A debt settlement agreement puts an end to this harassment.

Although debt settlement has many benefits for those who manage to secure a lump sum payment, there are several issues to consider. First, settlement might affect your credit score because the creditor may report it under ‘settled for less than owed’. Potential lenders who examine your credit report will see that you haven’t paid your dues in full. They may regard you as a high risk borrower who is unable to meet his financial obligations. You may try and persuade the creditor to remove all negative statements that damage your credit record. Keep in mind that there are some tax implications. Although the settlement procedure saves you a good amount of money, you still owe income tax on the money in the year the settlement procedure took place.

Keep in mind that most creditors will not agree to initiate a settlement procedure before you are between 60 and 90 days down. It is obvious that they won’t offer borrowers to pay half of their dues if they are current on their payments. In addition, if you make regular payments to all other creditors, the crediting institution you are trying to negotiate with may be unwilling to settle. If you can meet other financial obligations, it is reasonable to conclude that you can pay them as well. Finally, if you find the settlement process overwhelming, you might opt for a debt settlement program.