Debt Reduction Settlements

Depending on your circumstances, your credit counselor may be able to negotiate a debt reduction settlement with your creditors. Under a debt reduction settlement, a creditor agrees to reduce the amount you owe in return for a guarantee that you will pay off the reduced amount at specified terms. This process also is referred to as third-party debt negotiation.

The criteria for qualifying for a debt reduction settlement are the same as for a DMP. The settlement can include credit card and other unsecured debt, but not mortgages, auto loans and other secured debt such as student loans, or legal obligations such as alimony, child support and fines.

Under a debt reduction settlement, the debt is generally resolved within one to three years, with creditors settling for between 20 and 80 percent of the original debt. After you pay the agency fees and settle the debt, you will see an average of 40 percent in savings.

However, watch out for agencies that promise to reduce your debt by 50 to 70 percent. Many of these agencies are not reputable and unlikely to deliver.