Debt settlement is one of the many forms of debt relief. It happens when a creditor agrees to accept a lump sum that is less of what is owed. Debt settlement has to be negotiated.
The negotiation can be done either directly or through a legit debt management company. Normally a creditor would agree to a debt settlement when you have not made any payments for at least six to nine months and your debt does not have any collateral – this is normally a credit card debt or unsecured credit lines.
In some cases the original creditor sells the debt to a debt collection agency for mach less of what is owned as a total amount. In general collection agencies have more aggressive tactics in their attempts to collect the debt. But since they purchased the debt at a discount from your original creditor, you may be able to settle even for less.
Once the debt settlement amount is negotiated make sure you get it in writing and signed by an authorized employee or account manager. Read carefully the terms of the debt settlement. If acceptable make sure you make the full payment before the deadline stated in the settlement.
If you decide to use a debt management company the debt settlement payment may be spread over a period of time. You will be required to make payments to an account open by the debt management company and they take care of the settlement.
When the full amount of the required debt settlement payment is made the account is considered satisfied and is reported as “settled” to the credit agencies.
As a rule of thumb any debt settlement will negatively impact your credit ratings.