Debt Settlement: Everything You Need to Know

Debt Settlement is one of many debt relief solutions at your disposal for getting out of debt and rebuilding your credit. Ready to learn more? Read on to learn how it works.

What is debt settlement?

Debt settlement is defined as “an agreement between a lender and a borrower for a large, one-time payment toward an existing balance in return for the forgiveness of the remaining debt.”¹

To put it simply, you make a deal with your creditor or lender to accept one large payment instead of your full debt amount.

How does debt settlement work?

Debt settlement works by negotiating your current debt with your creditors (lenders) and debt collectors. The goal is to lower the amount you owe into something you can afford to pay so that you become debt-free and the creditor gets paid.

When you use debt settlement negotiation services from a reputable company, they negotiate on your behalf. Alternatively, you could negotiate directly with your creditors and attempt to settle your debt on your own. Read on to understand how negotiation works.

You may find it helpful to speak to a financial coach to explore your options and determine if you’re a good candidate for debt settlement.

Learn more about C&D’s Debt Settlement services >

How to negotiate debt settlement

Before you can negotiate your debt, your accounts usually need to be delinquent by at least 90 days. It’s common for creditors to sell your debt to a debt collector at around 180 days, so your window to negotiate is often within 90 to 180 days of delinquency.

Additionally, you’ll need some money saved to settle your debt. Some creditors accept payment plans, but usually, you’ll pay a lump-sum that’s less than the amount you owe. 

Using debt settlement negotiation services

Negotiating on your own can require a considerable amount of effort and time, which is why many people seek out professional services.

There are many benefits to using a debt settlement company to negotiate your debt vs. doing it yourself. If you’re new to debt settlement then you may find it easier to have a professional negotiate on your behalf. Additionally, debt settlement companies can customize debt relief plans based on your goals, your total debt, and your budget. Guidance from a professional service provider will ultimately help you stay on track to eliminate your debt and reach your financial goals.

When choosing a debt settlement company, it’s important to ensure that they are compliant with the Federal Trade Commission regulations for the industry. Consider the amount of time they’ve been in business, ask questions about negotiation fees and associated costs, and look for honest reviews about the business. Our coaches have experience with some of the most trusted debt settlement companies so, if you have questions, you can reach out and ask us, anytime!  

How to negotiate a debt settlement on your own
If you choose to do a DIY debt settlement, there are some things you should know:
  1. You’ll need to negotiate how much you can pay.
  2. You’ll need to negotiate how it’ll be reflected on your credit reports.

Be prepared to make a few calls before you come to an agreement. You’ll need to be convincing and purposeful in your approach to persuade them. You’re ultimately trying to convince your creditor that it’s worth it for them to reduce your debt, and you may not be able to resolve the settlement with just one conversation. 

If you previously sent a hardship letter, your creditor may already have an understanding of your financial situation or life events that may have affected your ability to make payments. If not, you’ll need to clearly outline the financial hardship that you’re experiencing when you’re negotiating.

Lastly, it’s crucial to get all the terms outlined in writing from your creditor before you make a payment. This holds the creditor accountable to honor the agreement, and holds you accountable to pay according to the debt settlement plan.
Because each financial situation is different, we’d highly recommend you speak to one of our certified Financial Coaches to explore your options. Talking to our coaches is always free – just sign up and request a coaching session right from your personalized Money Sensei™ dashboard! 

Is debt settlement worth it?

Debt settlement is not for everyone, but it could be worth it if you’ve explored all of your options, as there are many pros and cons to consider:


  • It helps you lower your debt
  • It reduces multiple monthly payments into one monthly payment
  • It helps you avoid bankruptcy, and provides better repayment terms than bankruptcy
  • It helps you stop creditors and collectors from contacting you


  • Your creditors might not negotiate your debt
  • You could end up with more debt (interest and fees still accrue during the negotiation process)
  • Forgiven debt may be considered taxable income
  • Your credit score may be negatively affected

Debt settlement FAQs

Am I eligible for debt settlement?

You may be eligible for debt settlement if you have more than $7,500 in unsecured debt. Our coaches can help you determine if debt settlement is a good fit for you.

How long does debt settlement take?

Debt settlement can eliminate debt in as few as two to four years. Compared to other debt options, which could take up to 9 years to eliminate debt.

How much does debt settlement affect your credit score?

Debt settlement can lower your credit score by up to 100 points at first, with less of an affect as time goes on. The impact of debt settlement on your score varies based on your current credit standing.

How long does debt settlement stay on your credit report?

Debt settlement stays on your credit for up to seven years. The impact on your score minimizes overtime.

Can I buy a house during debt settlement?

If you are pursuing debt settlement, to begin with, then you’re likely unable to make payments on existing debt. Your credit score was negatively affected (or will be), and it’s unlikely you’ll secure a mortgage at the best available terms. While you could try to purchase a home during debt settlement, it’s a better idea to take care of an existing debt, repair your credit score, and purchase one after debt settlement.