Debt Negotiation

Debt negotiation is when a consumer, credit counseling agency, attorney or a company specializing in debt negotiation, contacts creditors in order to settle an unpaid debt for less than the amount owed. The amount a creditor will settle for can vary greatly. The settlements usually range from 40% to 70% of the balance, but there are no absolutes.


  • The debt is paid at a significant savings and the creditor will not pursue further action.


  • Debt settlement requires lump sum payment rather than payment over time. Therefore, if you cannot readily access a significant amount of money it will not be an option for you.
  • Most creditors will not consider settling a debt unless it is seriously delinquent (behind).
  • At best, creditors will list the debt as 'settled' on the credit report.
  • Some debt settlement companies charge high fees and give poor advice.
  • If there are several creditors, they may require more money than the consumer has available.

What to Avoid

  • Avoid any company that claims to 'eliminate' debt without bankruptcy.
  • Debt settlement companies are for profit businesses, so be sure you know exactly what you will be charged. Some companies have you sign a contract to pay them a percentage of what they 'save' you, which can be a huge amount.
  • Avoid any company charging high fees, you can negotiate your own debt settlement and do not have to pay for this service.
  • Avoid any plan that will not solve all of your debt problems.
  • Avoid sending money until you have everything in writing from the lender.
  • Avoid companies that tell you to stop paying debts so they can be negotiated at a future time.

What to Look for

  • Get everything in writing.
  • If you're not negotiating yourself, ask for all fees in writing.
  • Investigate any agency or company before you sign anything.
  • Look for a plan that will solve your whole situation not just satisfy one or two creditors.

Potential Impact on Your Credit

This alternative will almost always have a negative impact on your credit ratings for a number of reasons. First, creditors will usually not settle a debt unless it is already seriously delinquent (behind) and delinquency in itself has a negative effect. Second, a successful debt settlement does not reflect "paid as agreed" on your credit reports, it will appear as "settled," or "not paid as originally agreed." Finally, not paying as agreed while waiting to settle a debt will cause the debt to grow, remain delinquent longer and possibly result in a lawsuit and judgment against the borrower.