Debt Settlement and its Alternatives

In recent years, debt settlement has become a popular strategy to clear overwhelming debt. It’s fast, and offers a number of key protections for debtors that make it an attractive option. Compared to declaring bankruptcy, it also has less of a negative effect on your credit score.

Debt settlement meeting

How does Debt Settlement work?

Participants in a debt settlement program agree to let the debt settlement company negotiate with their unsecured creditors (typically credit card companies). The idea is to be able to reach an agreement that allows the participant to resolve their debts while paying less than the original amount owed.

Debt settlement cannot be used on secured loans such as car payments and mortgages. It can, however, be used for unsecured loans such as credit card debt, personal loans, or medical bills.

Debt settlement allows debtors to get their clients out of debt fairly quickly, with 24-48 months being the usual period, compared to twice that time when going with credit counseling, or virtually forever if one chooses to merely pay off credit card minimums. Special debt settlement companies, like Americor can get some debtors out of debt in as little as 12 months.

When does the debt settlement bill come in?

The Federal Trade Commission (FTC) has imposed some standards which affords debtors a significant amount of protection from predatory business practices. Since 2010, FTC has mandated that consumers can only be billed by a debt settlement company if three criteria are met:

  1. The Service provider must negotiate the terms of settlement for a debt;
  2. The Client must agree to the terms of the negotiated settlement; and
  3. The Client must ratify that acceptance by making at least one payment to the creditor.

No fees can be collected on any of the relevant accounts until all these three conditions are met. This greatly reduces the costs and risks to those enrolled in accredited debt settlement programs.

Participants in debt settlement programs also have the following rights:

  • They may withdraw from the debt settlement program without penalty at any time, for any reason;
  • They may reject an offered settlement for any or no reason.

Thanks to these protections, debt settlement gives those with unsecured debts significant benefits compared to other alternatives such as declaring bankruptcy or credit counseling.

Credit counseling meeting

The alternatives

Credit counseling

Instead of debt settlement, you can use a Credit Counseling Agency (CCA) or a nonprofit that offers the same services to secure a debt management plan (DMP). These plans generally do not affect the principal amount of a debt, and only give a reduction in interest rates.

However, the available data since the Great Recession strongly suggests that a reduction in interest rates offers fewer benefits to consumers compared to a reduction in the principal amount. It will typically take much longer – 36-60 months with a DMP compared with 24-48 months through debt settlement. Completion rates are also quite low, with only a quarter (20-35%) of all qualified applicants able to complete their program.


While giving debtors a high level of protection, there are high costs to declaring bankruptcy. Depending on your state and the type of bankruptcy you’re filing, you will typically incur a number of non-refundable fees upfront, including filing fees, attorney’s fees and so on. Your credit will also take quite some time to recover in most cases. The completion rates for bankruptcy are also generally quite low, with only about 30% of all Chapter 13 cases being successfully discharged, nationally.

Minimum credit card payments

This is potentially the worst possible strategy and can potentially keep you in debt for the rest of your life. Since credit card companies get income by charging interest and penalty fees, they’re motivated to keep you in debt as long as possible. And because interest compounds, on top of paying interest on your principal balance you will also pay interest on the interest that has accrued until you pay off your entire balance. In our example in this post, a credit card balance of $6,354 can easily cost $32,397.85 over three decades if you only choose to make a minimum payment of 2%, or $127.08. Now if you paid 11 equal monthly payments of $577.64, you will be able to pay off $6,354 in under a year.

Debt consolidation loans

You may also attempt to get a debt consolidation loan. Unfortunately, it can be extremely difficult to find a creditor willing to lend you any significant amount of money if you are already in a bad financial position. In the vast majority of cases, if you do manage to get a debt consolidation loan, you can expect extremely high interest rates and punitive fees, which is quite understandable if you’re seen as a risk by creditors.

Debt settlement client meeting


Debt settlement often gets a bad rap due to unethical practices by unaccredited businesses that prey on desperate debtors. But the data leaves no doubt: when done the right way through debt negotiators duly accredited by the AFCC that follow FTC guidelines, debt settlement offers a safe, proven way towards securing your financial future. While it’s true debtors have many options available to them, the data is absolutely clear in demonstrating that for most people, debt settlement offers the fewest risks and the most benefits.