My local radio station has been running a bunch of ads from companies urging people who're struggling with paying their credit cards to "settle your debt for a fraction of what you owe." Their claim is that it's a better option than either debt consolidation or declaring bankruptcy.

The aggressive presentation they're using has a used car salesman feel to it and makes me suspicious of almost everything they're saying; but I don't have enough information to tell if they're offering a potentially helpful service or preying on the desperate and giving only snake oil in return. (A claim that credit card companies don't want you to know about it is probably true; but since they obviously would prefer to be paid in full doesn't speak to anything else in the pitch.)

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    To preempt some of the standard advise questions about debt problems seem to always get on this site; I'm only asking out of curiosity, and don't have any need for this type of service. Commented Feb 26, 2016 at 2:08
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    They are largely selling snake oil. You get most of the effects of bankruptcy without the benefit of a discharge.
    – quid
    Commented Feb 26, 2016 at 7:31
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    They are largely selling snake oil. You get most of the effects of bankruptcy without the benefit of a discharge....with the additional risk that what they are offering is a scam Commented Feb 26, 2016 at 11:58
  • Somewhat related question: law.stackexchange.com/questions/35505/… Commented Dec 20, 2018 at 21:42

3 Answers 3


If you are struggling with debt and cannot realistically pay your debts off with your current level of income, these businesses offer, for a fee, to negotiate with your debt providers a sum that you can realistically afford to pay.

The debt providers will consider the offer because they would rather get some money back rather than nothing (as these are usually unsecured loans).

For you it can be a better deal than going bankrupt or trying to struggle endlessly to pay off something you can't afford to pay off. Note, that even though you won't be bankrupt, you will be treated (by lenders) very similar to being bankrupt. In other words, it will be very hard for you to get new loans in the near future.

  • In Australia, these businesses are registered with and regulated by the government.
    – Victor
    Commented Feb 26, 2016 at 22:29

Basically, these guys break all your eggs then try to make an omelet. Your lender(s) must really believe that you have no ability to pay before they'll settle, which generally entails not paying them until your creditworthiness is in the tank.

Bankruptcy laws exist for a reason. If your credit is in the tank, you can't make your payments and you're shopping to settle your debts, it's not likely a bankruptcy would worsen your situation; in fact, quite the opposite. But, people have hugely negative feelings toward bankruptcy and don't want to be called a "deadbeat", these services prey on those people.


These agencies consolidate your debt and make it an easy monthly instalment for you. They also try to negotiate with credit cards. They do so for a fee.

Other option is to not pay the debt. During this time , expect credit cards to keep sending you bills and reminders and ways to contact you.

Once it is not paid for a significant amount of time ( 18 months ) , the lender will "sell" your debt to a collection agency. You will start getting bills from collection agencies.

Collection agencies can settle for up to 40 % of the actual debt. So if you had 5 credit cards , you would have 5 different collection agencies trying to get in touch with you. You can call them and tell them that you cannot pay the full amount. They will offer you settlements which you can accept or decline. The longer the unpaid debt , the more the discount they will offer.

One very important thing to remember is that the unpaid amount will be sent to you on a 1099-c form . This means you have to recognize this as income. It is applicable to the year when the debt is settled.

In a nut shell , you owe 120,000. You don't pay. Credit cards keeps calling you. You don't pay. After 12-18 months , they handover your debt to collection agencies. Collection agencies will try to get in touch with you. Send you lawsuit letters.

You call and settle for say 50,000. You pay off 50,000 in 2016. Your debt is settled. But wait you will get 1099-C forms from different agencies totaling 70,000 ( unpaid debt ). You will have to declare that as income and you will owe tax on that. Assuming say 30 % tax you will have to pay up 21,000 as tax to IRS assuming no other income for simplicity.

SO what you did was pay up 50 + 21 = 71,000 and settled the debt of 120,000.

Your credit score will be much better than if you never paid at all.

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    You touched on another important issue. Settled debt is taxable income, bankruptcy discharged debt is not.
    – quid
    Commented Feb 27, 2016 at 16:20
  • Settled debt is not taxable income, forgiven valid debt is. If the collection agency claims you owe them $120,000 and you settle for $60,000, you have $60,000 in forgiven, valid debt. But if the collection agency claims you owe them $120,000 and you agree that the actual debt amount is $60,000 and pay it in full, you have no taxable income because no valid debt has been forgiven. Commented Dec 23, 2018 at 6:43

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