What is a debt settlement program?

The percentage of a debt typically accepted in a settlement is 30% to 80%. This percentage fluctuates due to several factors, including the debt holder’s financial situation and cash on hand, the age of the debt, and the creditor in question. The debt settlement company you decide to work with plays an important role, too.... read full answer

For example, National Debt Relief has been able to settle debt for as low as 30% of the original balance, but could charge fees as high as 25% of that original balance. Additionally, while Donaldson Williams may reach a settlement as high as 60%, their fees are low at 17%. A few of the highest ranking debt settlement companies are listed in the table below.

Percentage of a Debt Typically Accepted in a Settlement:

The percentage of a debt accepted in a settlement depends on:

Your financial situation. In the process of negotiation, creditors will try to ascertain your financial situation and amount of cash on hand. Greater disposable income and available cash will generally lead to a lower percentage of forgiven debt. This makes sense; creditors want you to pay off as much debt as you can. It would be hard for you to make a case that your debt should be written off when you have the means to pay a decent portion of it.

How old the debt is. The older your debt is, the more likely it is that creditors will regard it as uncollectible. When they view debt as uncollectible, they’re more likely to accept a favorable settlement percentage. For them, getting some of the debt back is better than nothing. It’s important to note that while an older debt increases the likelihood of a favorable settlement outcome, it comes at the expense of your credit. You can read more about how debt settlement hurts your credit in our guide.

The creditor. During the debt settlement process, you will negotiate with either your original creditor or the collection agency assigned to your debt. If your account is over 180 days past due, you’re more likely to interact with a collection agency. Neither party has an obligation to settle debt, so whom you negotiate with plays an important role in the ultimate settlement percentage. It’s a good idea to do some research on the party handling your debt before beginning negotiations. You’ll learn more about their approach to debt settlement and others’ experience with them. The Better Business Bureau is a good resource for your research.

Bottom Line:

The typical percentage of debt accepted in a settlement depends on the debt settlement company you decide to work with (if any), your finances, amount of debt, and creditor. There’s nothing you can do to change your financial situation, but you can tailor your approach to the negotiations.

Before negotiations begin, use the credit card(s) in question only for essentials and attend a credit counseling session to learn about your options. This will show the creditor that you are acting in good faith and only pursuing debt settlement as a last resort. This will go a long way in improving your chances for a more favorable debt settlement.

Debt settlement stays on your credit report for seven years. The starting point for this seven-year period varies depending on the account’s payment history. For accounts with a history of on-time payments, the seven-year period begins on the date of settlement. For accounts with a history of delinquent payments, the seven years start on the date the account became delinquent and never current again. Since debt settlement generally involves late payments, this starting point is more common.... read full answer

The length of time debt settlement stays on your credit report also relates to how it impacts your credit score. During the debt settlement process, your credit score will drop due to missed payments (if applicable) and due to the reflection of the settlement on your credit report.

It’s impossible to predict an exact credit score fluctuation due to debt settlement without looking at an individual’s credit history. That being said, people who pursue debt settlement can expect a drop in credit score of at least 65 points, and sometimes over 100 points.

Debt Settlement on Your Credit Report:

To illustrate debt settlement’s effect on your credit report and credit score, let’s look at two different scenarios. In both cases, let’s assume that you have $10,000 in credit card debt, you’ve consistently made minimum payments on the account in the past, but you just lost your job and consequently cannot make the payments anymore.

• Scenario 1: You reach out to your creditor to explain the situation and ask for a settlement. Your creditor accepts a settlement on April 15, 2020. In this case, debt settlement will stay on your credit report until April 15, 2027.
• Scenario 2: You do not reach out to your creditor and simply stop making payments. Your first due date without payment passes. Your account is reflected as delinquent on April 30, 2020. In this case, debt settlement will stay on your credit report until April 30, 2027.

There are a couple of methods you can use to attempt to avoid the seven-year period, but there is no guarantee of acceptance.

Pay for Delete: It is possible that if you offer to either pay your balance in full or pay a higher portion of your debt, your creditor will remove the debt settlement from your credit history. It sounds like a great option, but it’s a legal gray area.

The Fair Credit Reporting Act requires creditors and debt collectors to report consumer information truthfully. In debt settlement cases, you incurred the debt, so removing it from your credit report doesn’t provide an accurate picture of your credit. A collection agency that offers to do this should be viewed with suspicion.

Furthermore, it’s possible that if you paid to have a settlement removed from your credit report, it could reappear. At that point, you would have no legal recourse since the reporting would be accurate. Generally, this option should be avoided.

Re-Aging: Delinquent debt can still be reported as late, even if you make monthly payments on it. By re-aging your account, a creditor can make the debt current, which will benefit your credit standing. You can request this during negotiations.

Bottom Line

Debt settlement, like other negative items, will stay on your credit report for seven years. There are a couple of alternatives to get around this reporting period, but these should be pursued with caution. You will be better off practicing good fiscal habits to boost your credit score organically, rather than wandering into a legal gray area that may or may not work out.