What is a Settlement?

• A debt settlement involves paying your outstanding debts. But instead of paying the full balance to satisfy the debt, you strike a deal with your creditors to pay a percentage of the money owed. For example, if you owe $10,000 on a credit card, and you're considering bankruptcy to erase this debt and other financial obligations, you can offer your creditor half the balance to completely satisfy the debt. Your creditor takes the money and agrees to stop future collection attempts.
  
  

Avoiding Bankruptcy

• Settling a balance -- as opposed to filing bankruptcy -- benefits you because you avoid tarnishing your credit report for 10 years. A bankruptcy can ruin your credit score, and fixing a low score after bankruptcy is no easy fix. With a debt settlement, you receive the opportunity to pay off your debts for less, and you avoid a major credit blunder.
  
  

Why Beneficial to Lenders?

• Understandably, lenders and creditors prefer full payment of outstanding balances. But when consumers consider filing bankruptcy, creditors and lenders realize that a discharge may wipe out the debt, wherein they're unable to recoup money owed. Settling the balance is more beneficial because lenders and creditors are given the opportunity to receive some of the monies owed to them, as opposed to nothing at all with a bankruptcy.
  
  

Consequences of Settling Balances

• Settling a balance isn't without consequences. Creditors and lenders typically include an explanation on credit reports that read "settled for less than the balance owed," or simply "settled balanced." Future creditors or lenders checking your credit file will see that you negotiated a debt settlement, and having a settlement in your past can affect future financing. A settlement could scare potential creditors and lenders. They may reject your application, request additional documentation before approving or charge a higher interest rate.