How Debt Settlement Works
- Hiring a debt settlement firm to negotiate settlements on your behalf
- Stopping regular payments to creditors and allowing accounts to become delinquent
- Creditors eventually agree to accept a lump sum payment that is less than the balance
- The consumer saves up settlement funds over several months and makes the payoff
In exchange for the lump sum payment, the creditor forgives the remaining account balance. This allows the debtor to settle accounts for often substantially less than what’s actually owed.
Analyzing Debt Settlement Completion Rates
While debt settlement completion rates vary, statistics show it does frequently succeed in reducing debt:
- Industry data reports typical settlement rates of 50-60% for credit card debt when performed by reputable firms.
- Rates for other unsecured debts like medical bills and personal loans range from 25-45% on average.
- Consumers participating in debt settlement programs eliminated on average 55% of their enrolled debt according to a 2021 CFPB report.
So while debt settlement success is not universal, it much more often than not provides some level of debt reduction for committed consumers.
Factors Impacting Success Rates
Several variables influence the likelihood of securing debt settlements:
- The consumer’s financial profile and history
- State regulations regarding debt settlement practices
- Creditor policies about debt resolution options
- The skill and reputation of the debt settlement firm
Consumers should research firms thoroughly before enrolling to aid completion rate success.
Ideal Candidates for Debt Settlement
Those best positioned for debt settlement include:
High Unsecured Debt Relative to Income
Consumers owing $20,000 or more in credit cards or medical debt compared to earnings benefit most from settlement savings versus prolonged repayment plans.
Steady Income But Overwhelmed by Payments
To qualify for debt settlement, consumers need regular income sufficient to cover minimum living expenses and save extra for settlements. This rules out the unemployed or those on fixed incomes.
Willingness to Alter Spending Habits
Settling debt requires dedication to altering spending habits and lifestyle for several months to stockpile settlement funds. Consumers must prepare for a committed process.
Significant Savings Are Achievable
When suitable candidates enroll with reputable firms, debt settlement facilitates dramatic savings, often over 50% of balances owed. This chart illustrates the powerful impact debt settlement can provide: