Credit glossary
Debt settlement
Negotiating with creditors to accept less than the full balance, either on your own or through a settlement company that charges a fee.
Settlement programs often involve stopping payments while money builds up for offers, and the FTC lists the risks: you might not finish the program, creditors can start collection or sue, and late payments pile up on your report. A settlement company can't collect its fees before it actually settles a debt, and a demand for upfront fees is a warning sign.
Settled accounts are reported as settled rather than paid in full and stay seven years from the original delinquency. The FTC says the forgiven amount could be taxable income, and the IRS describes exclusions such as insolvency. You can negotiate a settlement yourself for free. Get every term in writing before paying, including how the account will be reported.
Guides that go deeper
- Settling a debt for less than you owe: credit and tax effectsSettling closes a debt for less than the balance, but it's reported as settled and the forgiven part can be taxable. The math and the 1099-C, explained.
- Rebuilding credit after debt settlement: what's left and what to fixAfter a debt settlement, your report shows the late payments, the charge-offs and a settled status. How long each lasts, the tax bill, and how to rebuild.
Sources
- How To Get Out of Debt, Federal Trade Commission
- Topic no. 431, Canceled debt: Is it taxable or not?, Internal Revenue Service
- How long does negative information remain on my credit report?, Consumer Financial Protection Bureau
This is education, not legal or financial advice. Spot an error? Tell us and we'll fix it.