Top 10 Frequently Asked Questions (FAQs) about Debt Settlement

1. What is debt settlement?

Debt settlement is a process where you or a company negotiates with creditors to pay less than the total amount you owe. In exchange for a lump sum or structured payments, the creditor considers the debt resolved (“settled”).

2. How does debt settlement affect my credit score?

Debt settlement usually hurts your credit score in the short term because accounts are marked as “settled for less than the full balance.” However, once balances are resolved and you start building positive payment history, your score can recover over time.

3. How long does a debt settlement stay on my credit report?

A settled account typically stays on your credit report for up to seven years from the date of the first delinquency. Its impact lessens as the account ages, especially if you maintain good credit behavior afterward.

4. Is debt settlement better than bankruptcy?

It depends on your situation. Debt settlement can resolve debts without the lasting stigma of bankruptcy and typically has a shorter recovery timeline. However, if your debts are overwhelming, bankruptcy may provide more comprehensive relief. A financial professional can help weigh the options.

5. Do I have to pay taxes on forgiven debt?

Yes—any forgiven debt over $600 is generally considered taxable income by the IRS. Creditors may issue a Form 1099-C, and you may owe taxes unless you qualify for an insolvency exemption.

6. Can I settle debts on my own, or do I need a company?

You can negotiate directly with creditors on your own. Debt settlement companies can help, but they often charge 15–25% of the settled debt amount. If you’re comfortable negotiating and organized, you can save money by doing it yourself.

7. What types of debt can be settled?

Debt settlement usually works best for unsecured debts like credit cards, personal loans, and medical bills. It generally does not apply to secured debts (mortgages, auto loans) or government-backed debts (federal student loans, taxes).

8. How long does the debt settlement process take?

It typically takes 24–48 months to complete a debt settlement program, depending on how much you owe, how much you can save monthly, and how quickly settlements are negotiated.

9. What are the risks of debt settlement?

• Negative impact on your credit report.

• Creditors may continue collections or sue before settlement is reached.

• Fees if you use a settlement company.

• Possible tax liability on forgiven debt.

  
  

10. How soon can I rebuild my credit after debt settlement?

You can start rebuilding immediately after your final settlement payment. With new positive accounts, low balances, and on-time payments, many people see meaningful credit recovery within 12–24 months.