How Much Debt Can Be Forgiven With Debt Settlement?
- UpdatedNov 3, 2024
- Not all debt is negotiable.
- Creditors tend to be more willing to negotiate when you have a genuine need.
- Some people have had very good results with debt settlement.
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Life happens, and it’s possible to end up with debt you intended to repay, but can’t. There is a way you could reduce what you owe, and get rid of the debt cloud hanging over you.
Debt settlement has helped many people regain their financial footing. It can be a lifeline to a brighter, less-stressful financial future.
You may wonder whether creditors are willing to reduce debts—and if so, by how much. Creditors do negotiate, especially with people experiencing financial hardship. But there’s no such thing as a get-out-of-debt-free card.
Let’s take a closer look.
What is debt settlement?
In a nutshell, debt settlement involves negotiating with your creditors, asking them to accept less than the full amount you owe and forgive the rest. They usually won’t forgive the entire debt, but they may be willing to reduce it if you’re experiencing a financial hardship. Forgiving a portion of the debt could cost them less than suing you, and from the creditor’s perspective, getting something is better than getting nothing.
How much debt can be forgiven? The factors at play
There's no standard percentage or amount when it comes to debt settlement, but here are the factors that influence the amount you might save:
How much you owe: Generally, higher balances may have more room for negotiation.
Your financial situation: Creditors are typically more likely to negotiate if they believe you genuinely can't afford to pay back the full amount.
The creditor's policies: Some creditors are more open to settlement than others.
Your negotiation skills: A skilled, determined negotiator (whether it's you or a professional) can make a big difference.
Real-world examples of debt settlement
Reddit user Equal_Friendship_434 shared that they settled a debt for 30% of what they owed.
Reddit user lastbet05 shared that they settled a debt for 27% of what they owed.
MyFICO user crrredit shared that they settled a debt for 10% of what they owed.
These aren’t Freedom Debt Relief customers and we didn’t confirm those results.
Set realistic expectations
It’s possible to significantly reduce your debt through negotation, but it's important to be realistic.
Not all debt is negotiable. For example, child support and most student loans are ineligible for settlement.
Debt settlement has a negative impact on your credit score. How much impact depends on your situation and what credit score you started with.
On your credit reports, debts reported as “settled” are considered less favorable than debts “paid as agreed.” However, settled debts are better than open collection accounts.
Some people stop making payments so they can save money to negotiate with. If you miss debt payments, that’s likely to have a serious negative impact on your credit. If you have great credit when you fall behind or settle a debt, your score could take a big hit. Many people who qualify for debt resolution are already behind, though, and debt settlement may prevent worse damage.
Settling debts could result in denials when you apply for credit in the future, depending on the creditor’s policy.
Settled debt may have other costs. Besides the portion of the debt you need to pay, you might incur other costs when you settle debts. The forgiven debt is reported as taxable income. Not everyone has to pay income taxes on settled debts, but you might, so consult with a tax professional before making any decisions about settling debts. Also, if you work with a professional debt settlement company, you pay a fee for each debt they successfully negotiate.
Getting out of debt takes time and patience. Debt settlement isn’t a quick fix. The negotiation process can be lengthy and stressful.
Steps to take if you're considering debt settlement
Assess your debt situation. Make a list of all your debts, including amounts, interest rates, and creditors.
Research your creditors. Find out their policies on debt settlement. You might have to do some digging. Try user forums like Reddit, where you can search for other people’s experiences with the same creditors.
Consider professional help. A reputable debt settlement company can guide you through the process and negotiate for you. Before you agree to work with anyone, check the Better Business Bureau and TrustPilot for information and reviews. Learn about the red flags for debt relief scams by reading the Federal Trade Commission’s website.
Prepare to negotiate. Gather documentation about your financial situation and the cause of your hardship. Be ready to explain your situation.
Persevere. It takes time to negotiate, and time to pay off your negotiated debts. It helps to give yourself reminders of the end goal and your reasons for wanting to be free of your debts.
Is debt settlement right for you?
Debt settlement isn't a magic wand. It’s not right for everyone. But if you're struggling with overwhelming debt and you've explored other options, it might be worth considering. The key is to go in with open eyes, realistic expectations, and a plan.
Insights into debt relief demographics
We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during September 2024. The data provides insights about key characteristics of debt relief seekers.
FICO scores and enrolled debt
Curious about the credit scores of those in debt relief? In September 2024, the average FICO score for people enrolling in a debt settlement program was 581, with an average enrolled debt of $24,531. For different age groups, the FICO scores varied. For instance, those aged 51-65 had an average FICO score of 585 and an enrolled debt of $27,303. The 18-25 age group had an average FICO score of 549 and an enrolled debt of $14,301. No matter your age or debt level, it's reassuring to know you're not alone. Taking the step to seek help can lead you towards a brighter financial future.
Student loan debt – average debt by selected states.
According to the 2023 Federal Reserve Survey of Consumer Finances (SCF) the average student debt for those with a balance was $46,980. The percentage of families with student debt was 22%. (Note: It used 2022 data).
Student loan debt among those seeking debt relief is prevalent. In September 2024, 27% of the debt relief seekers had student debt. The average student debt balance (for those with student debt) was $48,703.
Here is a quick look at the top five states by average student debt balance.
| State | Percent with student loans | Average Balance for those with student loans | Average monthly payment |
|---|---|---|---|
| District of Columbia | 34 | $71,987 | $203 |
| Georgia | 29 | $59,907 | $183 |
| Mississippi | 28 | $55,347 | $145 |
| Alaska | 22 | $54,555 | $104 |
| Maryland | 31 | $54,495 | $142 |
The statistics are based on all debt relief seekers with a student loan balance over $0.
Student debt is an important part of many households' financial picture. When you examine your finances, consider your total debt and your monthly payments.
Manage Your Finances Better
Understanding your debt situation is crucial. It could be high credit use, many tradelines, or a low FICO score. The right debt relief can help you manage your money. Begin your journey to financial stability by taking the first step.
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