Debt Settlement

By Jessica Sommerfield

The debt settlement industry witnessed an underrepresented growth in the 2000s. There were complaints against debt settlement; some claimed it never worked for them. Debt settlement companies promise extraordinarily low payoffs, with some taking advantage of customers’ fears and their dislike for big companies offering credit card services. 

Most don’t discuss with their customers the likelihood that debt settlement may not work in their cases and the negative consequences the customers may face. The realities of debt settlement may be shocking to some customers, but they normally realize when it’s already too late. But debt settlement still works. 

The success of debt settlement depends on your financial circumstance and the debt settlement company you are dealing with. That’s why it’s important to understand all that debt settlement is all about before you call a debt settlement company.

Here are some debt settlement realities you need to know. 


Your creditor can sue you before you clear your debt. Being sued is complex because it puts you in an awkward financial position. You’ll have limited options when sued, and the judgment goes against you. The only ways you can survive the judgment is when you can:

l Paying (satisfying) the judgment fully

2 Prove that you are too poor and considered judgment-proof by the creditor. You must prove that your income is minimal, you survive on state benefits, you have no assets/property, or your bank account is empty.

3 File for bankruptcy. Filing for bankruptcy will give you a bad credit score for 10 years.

Credit Score 

When you agree with your creditor to clear your debt by paying less than what you owe, the creditor will report you (your account) for settling your loan with less than what you owed. This will affect your account for seven years because it will appear in your credit report. 

A delinquent account hurts more than most actions on your credit report, excluding accounting closure for non-payment, foreclosure, or bankruptcy. A settlement appearing on your report will make your credit score drop by at least 10%, depending on your past payment history and current credit rating.


When you clear your loan through debt settlement, the IRS considers that you spent money you now won’t pay. In the eyes of the IRS, that money you spend counts as income and has to be taxed. 

In fact, at the end of the year, your creditor will send you Form 1099-C if the amount forgiven is $600 or more. Even if you are forgiven a smaller amount, the IRS expects it to appear in your tax return under “other income.” You can find more about this from the many online national debt relief reviews.


You don’t have any right not to pay what you owe. Some debt settlement companies may lie to you that you are safe even if you don’t pay your loan, claiming that some laws protect you. Such laws don’t exist. You’ll face all the consequences if you fail to pay your loans. You can be sued and have your assets seized. So, before you stop paying your loans, consider the risks you expose yourself to. 


A debt settlement company will not tell you that you can negotiate a settlement with your creditors. They want you to believe you must pay them to negotiate on your behalf.

A debt settlement company is only important if you aren’t good at negotiation or need more confidence to face your creditors. If you are persistent and confident, you can achieve a 50% success rate that debt settlement companies also achieve. And if you succeed, it will save you money. 

Never trust everything that a debt settlement company tells you. Do your research and make the best choices.