A debt settlement or debt recovery, usually takes place when a debtor is unable to pay the debt and the attempts of the creditor to take back his money have failed. This process where the creditor cancels a part of the debt and agrees to accept the remaining is also called debt negotiation. There is some difference between debt settlement and debt negotiation. The settlement is an agreement and the negotiation is the process employed for the same. The consumers either approach a debt settlement company or approach their own creditors before this. They also take debt counseling conducted by experts in which they negotiate with the creditors to settle the debt for a lower amount than owed, as the debtor saves their money for a lump-sum settlement payment. In this process the debtor receives a letter from the creditor stating that the debt obligation is fulfilled.



Debt settlement programs are also provided by third party debt resolution firms who coordinate the payment plans, and then collaborate on behalf of the consumers. These programs lower the monthly payment contributions to a minimum and get consumers debt free in a short span of time.

There are various types of debts that are eligible for debt settlement. Usually, only unsecured debts like the credit cards and medical claims can be fixed for payment. Home and car loans which are secured debts cannot be settled for payment because the creditor can recover the items bought with the credit issued to the borrower. If the debtor chooses to enter in a debt settlement program, then some companies accept smaller debt loans. The debtor's primary motivation for the enrollment in such a program is to pay off the debts according to the debtor's financial capability. On the other hand the motivation of the creditor is to get back his funds, which would be impossible if the debtor filed for bankruptcy. In this the creditor usually gets more funds as compared to the normal process.

The process of debt recovery is a very demanding task for the debtor because agencies are repeatedly contacting them to accumulate money owed on bills, loans and other balances. In this the collector may choose to pursue the funds through phone, mail, fax, in person or telegram.

Reputable agencies employ numerous resources for tracing debtors. They have an access to many public databases which help to trace the debtor's recent activities. They hire professionals who investigate into the affairs of the debtor.

There are basically five main objections for debt settlement. They are as follows:

Damages credit

The method of negotiating and reaching debt settlements with creditors requires the debtor to set aside money into a settlement fund from which settlements are paid. Due to the debtor's financial hardship, the debtor is unable to make minimum payments towards credit card debts while saving up and setting aside money to payoff settlements.

Increased collection calls

The failure to continue the planned debt repayment results in increased debt collection activities that cause the debtor undue stress.

Possibility of lawsuits

The fright of lawsuits is also an objection to debt settlement.

Tax consequences

Another common objection to debt settlement is that debtors whose debts are partially canceled outside the bankruptcy system will need to report the canceled portion of the debt as taxable income.

Debt settlement trade associations are also being set up to promote the state governments as many state legislatures are passing laws that restrict out-of-state companies from providing debt negotiation services to in-state residents. Two examples of these associations working at the global level are the United States Organization for Bankruptcy Alternatives (USOBA) and The Association of Settlement Companies (TASC).