Debt settlement (also known as “debt arbitration”) is sort of a last result for those already close to bankruptcy. It’s distinct from debt consolidation; in consolidation, you take out a loan to pay off all creditors in one go. In this scenario, the creditors agree to a “cram-down” of 40-60% of the principal owed.
At the end, the creditors are obligated to report the debt as fully discharged. It’s better than wiping the slate clean with a Chapter 7 (and wrecking your credit for the next several years), but it’s got its own pluses and minuses as well. In this section we’ll discuss:
• How credit card debt settlement works
• The timeframe for completing the credit card debt settlement process
• Who would be a good candidate for debt settlement
• Selecting a reputable debt settlement company
• Disadvantages to debt settlement

The Process
It’s possible to strike a deal with creditors on your own, but be prepared for an uphill fight, in the form of pushy collection calls and possibly a lawsuit or two. There are pro-forma letters of settlement available should you decide to go this route, but some of them include some fairly unreasonable terms. You can also have an attorney in your corner, but again, be prepared for more expense should you go this route.
One thing for sure; the credit card companies won’t make it easy for you., because you won’t have much leverage going into it…and you’re probably going to be better off with a third party involved. But bear in mind that you’ll need to reform your spending habits before you get any farther; you’ll need to impose some real financial discipline to be able to keep up on your settlement.
Payments will then be structured according to your ability to pay, and you‘ll make one monthly lump-sum payment to the third party. A cease-and-desist order will typically be served on the creditors, to stop collection calls.
The Timeframe
A typical repayment schedule will spread payments out over a 36-to-60-month period, with a month or two on the front end to get everything set up.

Who Needs Debt Settlement
There are 21-year-olds fresh out of college who are already carrying $20,000 in credit card debt. That is sort of an extreme example, but it’s not at all unusual. A typical candidate for credit card debt settlement is someone who’s exhausted every other option, owes more than $10-20,00 on cards and is falling behind on payments. Most companies won’t even entertain the idea of a settlement unless you are three to six months behind on payments (thereby racking up more late fees and penalties).
Please bear in mind that, as we said earlier, debt settlement is a more extreme measure than others and should really only come in as a last ditch plan. The high dropout rate of clients who don’t see the program through completely should serve as a red-flag and caveat.

Finding a Good Debt Settlement Company
Finding a good debt settlement company can get real tricky. Fee structures are all over the place, often tacking on 15-18% of the debt owed as a service charge. One case study recently found a company that imposed a $5000-plus “service charge” onto a $33,000 debt! That’s $5000 that would go pretty far with a consumer attorney or bankruptcy lawyer.
Plus there are instances where, once a credit card company finds out the customer is going this route, they will “escalate” the account. That means stepped-up collection efforts and possibly even a pre-emptive lawsuit, which would result in the settlement company dropping the client. As in the rest of the credit-management industry, there’s been an explosion of new companies, and some have been so shady as to be shut down by the FTC. As with anything, explore all your options, comparison-shop between different services to see their fee model and what they can offer, and do your homework with the BBB.

The Down Side
As with other debt plans, your credit rating and FICA score will almost certainly take a beating from going this route, even though your creditors have reported your debt as completely discharged. Also, again, the savings from going this route will be reported to the IRS as “income” and you will be held liable at tax time. Plus, debt settlement only works for unsecured (I.e. credit card) debt, not something like a home loan or car loan. If you’ve already made it this far downscale, choose carefully between the liabilities of debt settlement and a total discharge of debt through bankruptcy court.