Mint has you covered during coronavirus. Stay up-to-date with the latest financial guidelines and resources here.

MintLife Blog > Credit Info > When Is It Smart to Settle a Debt?

When Is It Smart to Settle a Debt?

Credit Info

It’s next to impossible to turn on the TV without seeing some sort of advertisement for debt settlement.  But is settling a debt the right choice?  Not once has anyone ever heard me suggest that you shouldn’t pay what you owe your lenders and this won’t be my first time.  This will, however, be about how to get out of debt as inexpensively as possible.

Settlement is the process of paying some, but not all, of what you owe to either a creditor or collector.  Once a debt has been settled you don’t owe anything else on that particular obligation.  The settlement option is certainly not new, but has become a more common way of extinguishing debts over the past few years, thanks to the aggressive advertising.

Settlements are reported to the credit reporting agencies and are considered serious derogatory items by FICO and other credit scoring systems.  That means they’ll likely result in lower credit scores, although most consumers who have to settle debts are already behind on their payments so the damage isn’t as profound as you would think.  The question is… is a settlement the right option for you?

Almost all creditors and collectors (and the IRS) will consider settlement offers. Why?  They’ll consider settlements because it’s good business. If I owe you $50,000 and I can only pay you $15,000, then isn’t it wiser for you to accept $15,000 instead of chasing me down for the full amount only to get nothing when I file for Chapter 7 bankruptcy?

When is a Settlement A Smart Choice?

In case you care, settling with a creditor not unlike burning a bridge. Some creditors will never do business with you again if you 1) settle a debt owed to them or 2) discharge a debt owed to them via a bankruptcy. And while the future prospects of not being able to do business with a handful of lenders probably isn’t terribly important to you, it should at least be considered. What happens if you work for a company that tries to get you a business credit card from one of the spurned lenders?  That’s going to be an embarrassing conversation to have with your boss.

On the other hand, settling with a collection agency is almost painless except for the issues I wrote about on Mint last week here.  Most collection agencies have purchased the defaulted debt from the original creditor for pennies on the dollar so while you technically owe them the full amount, they certainly don’t have the same skin in the game as the current balance suggests.  This makes settlement offers not only a viable solution for you but still a profitable one for the collection agency.  If they purchased a $1,000 defaulted debt for a few dollars then a $250 settlement is wildly profitable and yes, it’s good business.

When is Settlement a Bad Choice?

This is an easy one. Settlement via a third party settlement company is almost always a bad idea. Many of them are rip-off artists and even the legit players are not terribly honest about the full and true impact of their services on your credit and legal exposure to creditor lawsuits.  Transparency and full and complete disclosure are huge problems in the debt settlement industry. In fact, some of them tacitly masquerade as legitimate debt counseling agencies such as the member organizations of the National Foundation for Credit Counseling. How can you tell the difference? Go to NFCC’s Online Counseling Request page and enter your zip code to find a legit debt counselor in your local area.

You can do everything a settlement agency can do on your own and save the hefty fee they’d love to collect from you. And, some lenders won’t even work with debt settlement companies. “We do not accept settlement offers from for-profit debt settlement companies that focus exclusively on debt settlement”, according to Marina Hoffman Norville, an American Express Spokesperson.

And let’s face it; sometimes bankruptcy is a better option than settlement, especially if you are unemployed and can’t come up with enough money to make even modest settlement offers. It’s a recognized and legal way of protecting yourself from your creditors. And while it’s not always the worst option, it should probably be your last considering the decade it will take to fully rebuild your credit.


John Ulzheimer is the President of Consumer Education at, the credit blogger for, and a contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of or Intuit. Follow John on Twitter.






Leave a Reply