Debt relief glossary
Debt settlement
Negotiating with a creditor to accept less than the full balance owed as payment in full.
Debt settlement is a process in which a debtor negotiates with a creditor to pay a lump sum less than the full outstanding balance in exchange for the debt being considered paid and closed. Creditors typically only consider settlement when the account is seriously delinquent (90+ days past due) and the risk of recovering the full balance is low. Settlement amounts commonly run 40–60% of the balance, but the specific reduction depends on the creditor, account age, and the debtor's financial situation. Forgiven debt is generally taxable income (Form 1099-C) unless the debtor is insolvent at the time of cancellation — a key exception under IRC § 108.