Debt settlement: how it works and the risks

What debt settlement is

Debt settlement means negotiating with a creditor to accept less than the full balance as payment in full. It's usually only possible on accounts that are already seriously behind. Sustineri Solutions does not negotiate settlements; this guide is educational so you can make an informed choice.

The real costs

• Late payments and settled accounts can lower your credit score for years.
• Forgiven debt over $600 may be reported to the IRS as taxable income.
• Interest and late fees keep growing while you save up a settlement amount.
• Creditors can still sue during the process.

Your rights

Under the FTC Telemarketing Sales Rule, for-profit debt relief companies that sell by phone cannot charge fees until they have actually settled or changed at least one of your debts and you have made a payment under that new agreement. Be wary of anyone who asks for fees upfront or tells you to stop talking to your creditors.

Try these first

• Call creditors directly to ask for a hardship program or lower rate.
• Use a payoff strategy like avalanche or snowball with a tight budget.
• Look into a nonprofit credit counseling debt management plan.
• Grow income to speed up payoff — see our income streams guide.