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How Much Debt Do You Need to Consider Debt Settlement?

If you’re struggling with high amounts of debt, you may be wondering if debt settlement is a good option for you. Debt settlement involves negotiating with creditors to pay a lump sum that is less than the total amount owed in exchange for the remaining balance being forgiven. But how do you know if your debt level is high enough to make settlement worthwhile? Let’s take a look at some of the key factors to consider.

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What is Debt Settlement?

First, let’s make sure we’re all on the same page about what debt settlement actually is. Debt settlement, also sometimes called debt negotiation, is when you work with a creditor to pay a portion of your total debt owed in exchange for the creditor agreeing to forgive the remaining balance. For example, if you owe $20,000 on a credit card, the creditor may agree to settle that debt if you can come up with a lump sum payment of $10,000. That allows you to resolve the debt for 50 cents on the dollar.

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Debt settlement can be done on your own by contacting creditors directly to negotiate settlements. However, many people choose to work with a debt settlement company who has experience negotiating with creditors. The debt settlement company will charge a fee, often a percentage of the total debt amount, for providing this service.

Pros and Cons of Debt Settlement

There are some advantages and disadvantages to debt settlement that are important to consider:


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  • Allows you to resolve debt for less than the full amount owed
  • One lump sum payment instead of multiple payments over time
  • Debt settlement companies have expertise negotiating with creditors


  • Fees charged by debt settlement companies
  • May damage your credit score if accounts go delinquent or unpaid while saving up for settlement
  • No guarantee creditors will accept a settlement offer
  • Settled debt may be taxable income

When Does Debt Settlement Make Sense?

So when might debt settlement be a viable option given the pros and cons? Here are some factors to consider:

You Have Unsecured Debt

Debt settlement works best for unsecured debt like credit cards, medical bills, personal loans, etc. These types of debts don’t have collateral associated with them, so creditors have incentive to settle for less rather than get nothing if you were to default.

You Have a Lump Sum Available

Creditors will want to see a substantial lump sum payment offered in order to agree to a settlement. If you don’t have a large amount of cash available through savings, borrowing from 401k, etc., it will be very difficult to negotiate a worthwhile settlement.

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Your Debt is High Relative to Income

If your debt balances are very high compared to your income, debt settlement may be a good option since you likely can’t afford to repay the full balances through a debt management plan or other option.

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You Have Fallen Behind on Payments

If your debt accounts are already delinquent or in default, creditors will be more motivated to settle for less through debt settlement rather than potentially getting nothing if you file bankruptcy.

You Don’t Care About Credit Score Impact

Letting accounts become past due or defaulted will hurt your credit scores. If maintaining good credit is important, debt settlement may not be the best choice.

How Much Debt Do You Need?

There aren’t hard and fast rules on how much debt you need to have for settlement to make sense. But as some general guidelines:

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  • Total unsecured debt should be at least $10,000 – $15,000. Creditors are more likely to negotiate when larger balances are owed.
  • Minimum individual account balances of $2,000 – $5,000. Very small debts aren’t usually worthwhile settling.
  • Total debt should be at least 25% – 50% of your annual income. If debt is low relative to income, other repayment options may be better.

You also want to look at your available lump sum payment relative to total debt. Is the amount you can offer substantial enough to motivate creditors to settle? As a rule of thumb, you want your lump sum to be at least 25% of total debt to have a shot at negotiating worthwhile settlements.

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The Debt Settlement Process

If you determine your debt situation could benefit from settlement, here is a typical process if using a debt settlement company:

  1. You sign up with a debt settlement company and pay the initial fees.
  2. The company will have you stop making payments to creditors so you can build up the lump sum.
  3. Accounts go delinquent, then eventually default if no payments made.
  4. Settlement company negotiates with creditors once lump sum available.
  5. Creditors accept or reject settlement offers.
  6. If accepted, you pay agreed upon settlement amount as lump sum.
  7. Creditor forgives remaining account balance.

This process takes anywhere from 2-4 years in most cases. Be prepared for a lot of phone calls from creditors seeking payments during this time. Additionally, your credit score will be damaged while accounts are in default.

Alternatives to Debt Settlement

If debt settlement doesn’t seem like the right fit, here are some other debt relief options to consider:

  • Debt management plan – Work with credit counseling agency to repay debt through consolidated payments over 3-5 years.
  • Credit counseling – Get guidance from nonprofit credit counseling agency on managing/repaying debt.
  • Debt consolidation loan – Take out new loan to pay off multiple debts at lower interest rate.
  • Bankruptcy – Court supervised process to eliminate eligible debt under Chapter 7 or Chapter 13.

Be sure to consult with a financial advisor to discuss all of your debt relief options before deciding if debt settlement is right for you. And beware of debt settlement scams – always research companies thoroughly before signing up.

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