If you’re in debt, have fallen behind on your payments, and collection agencies are starting to call, settling your debt may seem like the best option. And it very well could be, but there are some things you should know first.


  • Settling your debt can be as damaging to your credit report as a bankruptcy

  • Your creditors don’t have to agree to settle with you

  • Settling your debt can be costly

Here’s what you need to know in order to make the best decision about debt settlement:

Debt settlement means paying less than the full balance owed

Simply put, settling a debt means reaching an agreement with the creditor or debt holder to pay less than what is owed. The percentage will depend on the creditor, the size of the debt, and the number of agreed upon payments (a single, large payment is usually preferred over multiple, smaller payments).


Creditors will almost never settle on a debt that is current. Nearly all settlements involve debts that are severely delinquent, or that have been sold to a debt collection organization.


Not all debt qualifies for settlement

Some of your debt can’t be settled for less than the full balance, including student loans, child support, alimony, and in most cases, secured debt like home or auto loans. Settlements tend to be limited to credit cards debts, unsecured personal loans, and medical bills. Depending on how much you owe to the IRS, you may also be able to reach a settlement to reduce your tax bill.


There is a statute of limitations on debt collection

There is a statute of limitations on debt, but it’s a little tricky to figure out how that impacts your personal situation. A few important points:


  • Each state sets their own statutes. Most are between 3-6 years, though some range from 2-10 years.

  • Different types of credit may have different lengths of statutes. Even within the same state, the statute of limitations on a credit card, personal loan, and promissory note could all be different.

  • Statutes of limitation have no bearing on your credit history or score. The two are not connected in any way.

Once the statute of limitations on a debt has passed, the creditor loses certain legal leverage. However, they can continue to attempt to collect the debt and even sue you for the funds. It's your responsibility to understand how your state’s statutes impact your debt and respond accordingly. Consult with an attorney or other qualified professional if you have questions about your specific debts.


Bankruptcy may be avoidable

If you’ve fallen behind on your payments due to a loss of your job or for a medical reason, credit card companies will sometimes allow you to make smaller payments (or skip payments altogether) for a short period of time while you get back on track. You’ll usually still be charged interest at the normal rate during this period, but it can help keep your debt from reaching catastrophic levels. If you feel yourself sliding too deeply into debt, consider speaking with our qualified credit counselor for free advice on how to stabilize your finances.