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How does debt settlement work?

When you find yourself deeply in debt, you're likely to get a lot of offers from debt settlement companies who promise to help you wipe out your debt for a fraction of the money you owe. But how does debt settlement work, exactly, and what are the pros and cons of this strategy? Here's a short primer that answers the question "How does debt settlement work?" for anyone considering this approach to debt relief.

How does debt settlement work?

Under a debt settlement arrangement, you'll stop paying your monthly bills to creditors and will instead make payments to a savings account with a US debt settlement service or agency. After several months, when your accounts are deeply in arrears, the agency will approach your creditors and offer to settle your debt with a lump sum payment that is less than what you owe. Your creditors may take this offer if they believe it's the best they can get from you.

Before entering a debt settlement agreement, it's important to understand all the potential downsides of this approach. That's why American Consumer Credit Counseling (ACCC) offers free credit counseling sessions to help you explore all your options for paying off your debt.

How does debt settlement work for credit card debt?

Settling credit card debt uses the same approach as settling other types of debt – you'll stop paying your credit card company and make an offer of a lump sum payment after a number of months.

How does debt settlement work if my creditors aren't interested?

Your creditors are not obligated to accept a debt settlement offer. In fact, they may choose to take you to court instead, or refer your case to a collections agency.

How does debt settlement work in terms of taxes?

If your debt settlement offer is accepted, you'll likely need to pay taxes on the portion of your debt that was written off by your creditors.

How does debt settlement work in terms of my credit rating?

Because debt settlement requires you to stop making monthly payments, the debt settlement credit score impact can be severe. You may not be able to apply for credit, rent an apartment, or buy a car for many years.

How does debt settlement work vs. debt management?

For many consumers, the credit counselors at ACCC recommend debt management over debt settlement. With a debt management plan, you won't default on your loans or bills, so your credit rating won't take a hit. And you'll get the assistance of counselors at ACCC to make a budget for paying off your debt, along with the support you need to stick to a plan and the training to develop financial habits that will keep you out of debt in the future.

How does debt settlement work compared to other debt relief strategies?

When comparing bankruptcy vs settlement vs debt consolidation and other strategies, the advantages and disadvantages depend on your financial situation. That's why it's helpful to get debt settlement advice from experienced professionals like the credit counselors at ACCC. At your free credit counseling session, we can explain the debt settlement bad credit impact and help you explore other options for successfully paying off your debt.

Contact us today for a free credit counseling session.

American Consumer Credit Counseling (ACCC) provides non-profit credit counseling, debt reduction programs and debt relief services to help consumers nationwide figure out how to pay down debt and how to get out of debt quickly. Our professional credit counselors provide free credit counseling to help individuals and families find the right debt solutions to help with credit card debt and avoid debt in the future. Our debt management programs provide help with debts by consolidating payments on credit card debt and other unsecured loans, with credit card negotiation services to reduce credit card debt interest rates and finance charges, helping consumers to pay off debt more quickly.

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