How Does Debt Settlement Work?

If you’re in debt, it might seem obvious that the only way to satisfy your creditors is to pay back what you owe in full. But there’s another option: pay back just a portion of what you owe through debt settlement.  

Settling your debts is similar to paying them off, but it involves a few extra steps. And it can work much faster than paying back your debts in full through minimum payments. If you’ve experienced some sort of financial distress that’s made it difficult for you to pay back your creditors, then a hardship-based program like debt settlement could help. 

So how exactly does debt settlement work? In a nutshell, debt settlement is the process of negotiating with creditors to reduce the amount owed on a debt. Creditors agree to accept a reduced amount to consider the debt paid, and the person who owed the debt is able to pay off the debt for less and faster than making monthly minimum payments. 

How Debt Settlement Works in 11 Steps

Debt settlement is a way to take control of your debt. It can reduce the total owed and make your payments more manageable. 

Debt settlement is based on a structured process of negotiating with creditors. These negotiations aim to reduce the amount you owe. Once that amount is more manageable you can start working towards a debt-free future. 

Here’s a concise guide to understanding how debt settlement works:

1. Assess your financial situation

Start by listing all your debts, income, and expenses, including current debt payments. This gives you a clear picture of what you owe and how much you can afford to pay. Laying all this out will help you see how close you are from being able to pay your current debts. If there is a wide gap between what you owe and what you can afford, debt settlement may be a good option for you. Debt settlement is for people who are experiencing a financial hardship that makes it difficult or impossible to fully repay their debts.

2. Contact a debt settlement company

Once you’ve taken stock of the situation, find a reputable debt settlement company. These companies negotiate with creditors to lower the total amount you owe. Research  the background and fees of different companies. Also read reviews from past customers. Choose one that fits your needs. 

3. Enroll in a debt settlement program

After choosing a debt settlement company, enroll in their program. First, read their agreement carefully. Then, you should have a free consultation about your situation. Once your consultant knows the details, they should provide you with a customized debt resolution plan. The process is likely to involve setting up a special account where you will deposit money regularly. This account will be used to pay your creditors once settlements are reached. The account is yours and you always have access to it.

4. Stop making payments to creditors

To build funds for settlements, many people choose to stop making direct payments to creditors. It could be difficult to save money for settlement offers otherwise. Instead, you’ll make one monthly payment into the special account set up by the debt settlement company. This step could lead to collection calls and a temporary drop in your credit score. Your debt settlement consultant should be able to advise you. 

5. Make monthly deposits into a settlement account

Each month, you’ll deposit a set amount into the settlement account. Making regular deposits is key. They build the funds needed to negotiate with your creditors. This money will accumulate until it is used to pay off your debts.

6. Debt settlement company negotiates with creditors

The debt settlement company will negotiate with your creditors on your behalf. Their goal is to get creditors to settle your debts for less than what you owe. This could involve several rounds of negotiations and may take some time. Debt settlement programs typically start to show results within six months. The full process usually takes two to four years. 

7. Creditors agree to settlement offers

Once the debt settlement company reaches an agreement with a creditor, they will offer it to you for approval. Creditors often agree to reduce the amount you owe if they believe it's the best way to recover part of the debt.

8. Authorize settlement agreements

Once you approve a settlement offer, the debt settlement company will proceed with it. The debt settlement company will use funds in your settlement account to pay your creditors the agreed-upon amount. As this happens, the debt settlement company will also take its fees from your account. Federal law prohibits debt settlement companies from charging you in advance. You should only pay a fee once an agreement is reached with a creditor, you approve it, and at least one payment has been made toward that agreement. 

9. Continue to reduce debt as agreements are reached

The debt settlement company is unlikely to reach agreements with creditors all at once. These agreements are more likely to happen one-by-one over several months. As agreements are reached, the debt settlement company uses money in your account to pay off creditors. Each time this happens, you’ll be one step closer to being debt-free.

10. Debts are marked as settled on credit reports

Once payments are made, your debts could be marked as settled on your credit reports. Paying less than you owe might hurt your credit score at first. In the long run though, resolving those debts could allow you to start rebuilding your credit score. 

11. Complete the program and exit debt settlement

After all agreed settlements are paid, you’ll complete the debt settlement program. At this point, both the number of debts you have and the total amount you owe should be reduced, or even eliminated. Completing this process is a significant milestone toward financial stability.

The 4-step Freedom Debt Relief settlement process 

In the Freedom Debt Relief program, debt settlement is a 4-step process, but keep in mind that other debt settlement companies may work differently.

1. Build funds for settlements 

Once you enroll in the Freedom Debt Relief program, the first step is for you to build up funds that will be used to pay creditors for settlements we negotiate on your debts. Instead of making minimum payments on your debts to your creditors, you will make a monthly deposit into an FDIC-insured account, which you control. 

The amount of money you need to deposit into this account each month is customized to fit your budget, and is often much lower than your minimum payments to creditors. That means that as soon as you enroll, you could see an immediate increase in your available cash each month.

2. Negotiate with creditors 

Once the funds in the account have grown large enough, our negotiation experts begin reaching out to your creditors to see if they are willing to settle for less than the full amount owed to consider your debt paid. One of the reasons why creditors are willing to accept a reduced amount is because individuals in our program have experienced a financial hardship.

Freedom Debt Relief has been negotiating with creditors since 2002, and we use this experience to create a custom strategy and negotiation timeline for each of our clients. Our goal is to settle all of your enrolled debt within 24-48 months, and over half of our clients get their first debt settled within 90 days of making their first deposit. 

3. Authorize settlements 

As soon as your creditor agrees to a settlement, we email and text you to share the details. Once you authorize a settlement, payment is processed from your FDIC-insured account to the creditor. The settlement payment may be one lump-sum amount, or it may be structured into multiple payments over time. 

Negotiation fees are processed from the same account to Freedom Debt Relief for that specific debt. The fee is based on the amount of debt enrolled into the program and is calculated into your monthly deposit. These fees are set and will never increase.

4. Celebrate financial freedom  

When the settlement has been paid in full, the creditor considers your debt fully resolved, and you can officially put it in your past!

This process repeats for all the debts enrolled in the program until each one of them has been resolved. At this point, you graduate from the program free of the debts you enrolled and in a much stronger place financially. 

Have questions? We are here with answers! 

To learn more about debt settlement and see if it’s the right solution for you, give one of our Certified Debt Consultants a call at 800-910-0065. We can assess your situation to see how soon Freedom Debt Relief could help you put your debts behind you.