Debt settlement, also known as debt negotiation, is a method used to permanently eliminate certain types of debt. Often reserved as a last attempt to collect a debt prior to writing it off as uncollectible, creditors are sometimes willing to accept a reduced financial settlement in order to fully satisfy a debt.

Currently, there are a number of non-profit organizations who are designed to offer debt negotiation services on behalf of debtors. Debt settlement companies, as they are often called, will contact each creditor and attempt to negotiate a settlement that reflects a fraction of the actual account balance. Depending on your available funds, a debt negotiation may require a lump sum payment or a structured payment program. For instance, you may owe a creditor $7,000.00 and have fallen terribly behind with monthly payments. A successful debt negotiation may result in a settlement of 20% or more of the total balance payable as either a lump sum or structured payments over a specified number of months.

Depending on the amount of the forgiven debt, which is calculated by subtracting the settlement amount from the original account balance, you may receive an IRS income voucher from the creditor. This means that, in some cases, you may be required to pay taxes on the forgiven debt.

One of the most common questions that individuals have regarding a debt settlement program is how their credit report will be affected. Many will say that debt settlement is damaging to a credit score; but compared to the alternative of having continually reported late or missed payments, debt settlement shows that you have made an attempt to repay the creditor within your means. Once a creditor accepts a debt settlement, they will report the account as "Settled Account" or "Settled in Full" to each of the three credit reporting agencies, including Experian, Equifax and TransUnion. Every 12 months, you may obtain a free copy of your credit report from each of the three credit reporting agencies noted above.

Unlike bankruptcy, which can remain on your credit report for up to 10 years, debt settlement notations will expire in 7 years. Once a debt is settled, your obligation to the creditor is over and they will not continue to pursue collection efforts against you for the forgiven amount. Every lender knows that bankruptcy laws exist and when a debtor cannot afford to pay their bills, filing is a very real possibility. If this happens, the lender knows that they may ultimately receive a small portion of the debt or, in some cases, nothing at all. Therefore, most are willing to negotiate a fair settlement to end their interest in the debt and to avoid having to pursue legal action in order to collect payment.

Depending on the total amount of debt that you currently owe, a debt settlement program may take several months or even several years to complete. As a final thought to debt settlement and/or debt negotiation programs, they are one of the industry's best kept secrets that allows debtors to get a handle on their finances and happiness in their home.