Debt settlement is nothing but the reduction in the amount of debt owed by a person by negotiation between the creditor and the debtor. Debt settlement can be only accepted by creditors if the debtor is not able to make payments towards the loan and has stopped his or her due payments. The advantage for debt settlement for creditors is basically that they do not have to write off debts and can settle for a lesser amount than what is owed instead of completely letting go of the debt.

• Debt settlement can be carried out by taking the help of debt settlement companies that act as negotiators or can be undertaken by the debtor personally. Many people also use a professional or an attorney for such matters. However, it cannot be denied that armed with some financial knowledge a debt can be settled by the debtor personally. Since many states in the U.S do not permit debt settlement companies to operate in their jurisdiction it sometimes becomes inevitable to settle the debt without any assistance.
• Debt settlement companies have attracted a lot of criticism due to their “creditor-friendly” attitude and are frequently accused of acting as a collection agency for the creditors rather than settling the debt in a fair manner. Furthermore, debt settlement has become common after 2005 when legislation made it compulsory for people to pass a “means test” before filing for chapter 7 bankruptcy. If the debtor fails this test then a chapter 13 bankruptcy is required and chapter 7 benefits cannot be availed of.
• Unlike chapter 7 bankruptcy, a chapter 13 bankruptcy will not wipe off the debts but may force people to pay a partial amount over a period of three to five years depending on the person’s income. Therefore debt consolidation agencies, which are for-profit, have gained popularity and have successfully remained profitable due to the recent recession and the collapse in the housing market. Since any type of bankruptcy can stay on the credit report for yen years, people choose debt consolidation agencies in order to keep a clean financial record.
• Since such debt settlement is done out of court and the creditors do not report the defaults, the credit report remains unscathed. However the advantage of this fact is taken by numerous debt settlement agencies to make huge profits by charging some sort of fee and a portion of the amount of debt that is forgiven by the creditor. The fact that it is a win-win situation for such agencies in any case combined with the truth that debt settlement is illegal in many states makes such a step a little risky from the debtor’s point of view.
• The fact that only unsecured debts are allowed to be settled in this manner implies that mortgages and auto loans cannot be settled by such negotiation. It has been recently reported that people are choosing to pay off credit card debt first and defaulting on their mortgage. The reason for this is that the amount of personal debt has risen dramatically in the last three years in the United States. People are in need of liquid cash and for many the only option is debt settlement since it does not adversely and directly affect the credit score of the consumer.
• Numerous banks and lenders have extended or opened new debt settlement departments to deal with unsettled debts. Some are fair and equitable in their approach and many are unscrupulous in their dealings. Deciding whether you need a professional debt settlement agency is the first step. Many people find it easier to negotiate by themselves and also save a lot in fees and other expenses incurred if an agency is not hired for the job.
• In a lot of states this practice is considered immoral, and debt settlement companies are not permitted to practice in Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming. This gives an idea of how wary a consumer should be when approaching a debt settlement agency for help. These companies set up a “trust” which acts as a savings account and pays the creditors and the debt settlement agency.
• Although debt settlement is advisable rather than filing for bankruptcy, extreme care needs to be taken in order to avoid being swindled. Many people have found themselves in deeper debt due to immoral practices carried out by such agencies. Inquiring about the reputation and standing of a company is important before taking any further action to reduce the debt.

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