Debt settlement — sometimes called debt resolution or debt negotiation — is a process in which a third party (or you directly) negotiates with unsecured creditors to accept a lump-sum payment that is less than the full balance owed. In exchange for that reduced payment, the creditor marks the account "settled" and closes it.

How it works in practice

Most enrolled consumers stop paying their creditors and instead deposit a monthly amount into a dedicated FDIC-insured account at a third-party bank. Once the account accumulates enough cash — typically after 4 to 8 months — the settlement firm begins offering creditors lump-sum payoffs, usually in the range of 40 to 60 cents on the dollar.

Programs typically last 24 to 48 months. Settled accounts are paid one at a time as funds become available, often starting with the smallest or most aggressive collector.

What it actually costs

• Settlement fees: 15% to 25% of enrolled debt, charged as accounts settle.
• Continued interest and late fees: Accumulate during the months you stop paying.
• Dedicated account fees: Typically $9–$15/month.
• Taxes: Forgiven debt above $600 generates a 1099-C; the IRS treats it as ordinary income unless you're insolvent at the time of settlement (Form 982).
• Lawsuits: Creditors may sue before settlement is reached. Garnishment risk is real.

The credit consequence

Stopping payments triggers 30, 60, 90 and 120-day delinquencies, charge-offs, and collections — all of which damage your credit profile. Independent scoring data shows an average FICO drop of 95–110 points during a 36-month program, with recovery beginning after the last settlement and typically completing within 24 months of program graduation.

Who it's right for

• Already delinquent on multiple unsecured accounts.
• $7,500 or more in unsecured debt (cards, medical, some personal loans).
• Cannot qualify for a consolidation loan at a meaningful rate.
• No significant assets a creditor could seize.
• Income too high or assets too significant for Chapter 7 bankruptcy.

Who should avoid it

• Anyone still current on payments with a credit score above 680.
• Federal student loan borrowers (settlement firms cannot help here).
• Anyone with secured debt as the primary problem (mortgages, auto loans).
• Households who could feasibly repay within 36 months via consolidation.

Red flags when shopping firms

• Upfront fees before any account is settled (illegal under the FTC's Telemarketing Sales Rule).
• Guarantees of a specific settlement percentage.
• Pressure to enroll on the first call.
• Refusal to disclose total program cost in writing.
• No accreditation with AFCC or IAPDA.