What is debt settlement?
Plain and simple debt settlement is a negotiation process. You may owe $20,000 to a creditor but through negotiations, you may be able to lower that to say $10,000.
Why would creditors take less than I owe?
In many cases they'd rather get some of their money back than none at all. With the threat of not getting any money they may write off a portion of the amount you owe as "bad debt" and settle with you.
Can anyone do this?
Debt settlement is most common with credit card debt. Every situation is different and every creditor handles debt settlement negotiations differently so it really depends on your specific situation - who your creditors are, if you've missed payments, the amount of debt you have, even the state you live in. All those factors come into play to see if you qualify. This is why debt settlement companies offer a free consultation and will need to speak with you on the phone before you can enroll in their program.
Can I settle my own debts?
You can try. However, it is difficult as you need to deal with a myriad of red tape and departments at the large banks who are likely your creditors. Debt settlement companies exist because they know how the system works and have relationships inside the banks with the key people who decide which debts will be settled. You also benefit from the fact that debt settlement companies dela in volume so the banks are more likely to negotiate with them simply because the amount of debts they control can be so large once they aggregate all their clients.
What are the consequences?
There are drawbacks to debt settlement which you must consider. Most importantly understand that your credit score will be damaged while you are in the program and there may be tax consequences as the IRS might consider your saving as income. Be sure to discuss this with your debt settlement company and your tax advisor.