Debt settlement is a process by which your creditor accepts a lump sump payment that is less than the current balance due. Upon receiving this portion of the total balance you owe, the creditor will generally consider your obligation to them as satisfied.

Considerations of debt settlement: Large up front payment amount: This means you will generally have to come up with somewhere between 10 – 90% of the remaining balance due before the creditor will accept such an arrangement.

Potential Negative Credit Rating: The creditor can still negatively impact your credit report by reporting the debt was “satisfied” as opposed to “paid in full.” This basically tells other creditors who review your credit file that you may be a risk to them because you did not pay your debt in full to another creditor.

Tax Consequences: Depending upon the state you reside in, creditors may send you a 1099 for the amount that did not get paid.

Example: Total Debt $8400. Creditor agrees to settle for $4620. You may receive a 1099 for the remaining $3780 the creditor wrote off. This can then be considered taxable income.

<< Back To Financial Training Center

My ex-boyfriend and I share credit card debt, who is responsible for paying it?
What is a debt resolution plan?
What is an action plan?
How much credit card debt is too much?
How can I get a copy of my credit report?
How can I establish credit?
What is a credit score?
I'm making my monthly credit card payments and not using my card anymore, why isn't my debt getting any smaller?
What is the Fair Debt Collection Practices Act (FDCPA)?
What is debt settlement?
What is the difference between secured and unsecured debt?
What is bankruptcy?
What is a debt management plan?
What is debt consolidation?