Debt Settlement

First lets define some terms.

Debt Consolidation

This is where you take a bunch of loans and wrap them up into one big loan–preferably at a lower interest rate.

Debt Settlement

This is the process of contacting the people to whom you owe money and offering to pay them a lower amount than what you owe.

You may wonder why companies would be interested in debt settlement at all. The truth is that when a company extends credit to consumers, they expect a certain portion to not pay at all. They set an interest rate that allows them to make money even though some people don’t pay.

Since the company expects to have to write off some of the debt, a customer who offers to pay something is better than a customer who pays nothing. At the very extreme edge of things, this is calling all your creditors and offering them 10 cents on the dollar–telling them that you are about to bankrupt, but you can afford to pay 10% of your debt and avoid bankruptcy. At the mild end of things is going to pay for a hospital bill of $5000 and offering $4000 in cash to cover the entire thing. (Collecting payment is one of the most difficult things for a hospital to do, so discounts of 20% for full payment are not uncommon.)

I do not condone using debt settlement as an excuse to get out of paying what you owe, but there are times when it is the only option to pay something without going bankrupt. In certain cases it can be a better option than debt consolidation.