As charge-offs (debts written-off by banks) were increasing, banks established debt settlement departments with special staff who could negotiate with defaulted cardholders to make their outstanding balances lower. This was done to recover funds that would otherwise be lost if the cardholder filed for bankruptcy. The settlements ranged between 25% and 65% of the outstanding balance.

Then companies were established to negotiate debt settlements with creditors on debtors’ behalf. Debt settlement companies are usually for-profit institutions, so you need to pay fee for the service. These companies’ goal is to negotiate reduction of the outstanding balance of each debt in exchange for a lump-sum payoff or short-term installment payoff.

When a debtor is involved in debt settlement programme he/she has to save up and set aside money to settlement fund, which is specially arranged to collect the definite sum of money. It’s due to the consumer to define the amount of money he/she can set aside into his/her special fund.

It mainly depends on his budget and expenditure. When the sum of money in this special fund is enough to make an efficient settlement offer, the debtor or the negotiator takes the next step – they negotiate with the creditor for a reduced payoff amounts (usually between 25% and 50% of the outstanding balance). If the creditor is satisfied with the amount offered to him, the two parties achieve the agreement and the consumer’s account is considered settled-in-full. But that does not mean the end of debt settlement programme. The debtor continues to save up and set aside money into that special fund to meet the next creditor’s requirements.

One of the most important advantages of debt settlement programmes is that you collect money and correspondently you'll owe more money than before when having problems with creditors. In a debt settlement program, the debt settlement company negotiates with the creditor to lower the outstanding balance of the debt. It organizes paying off consumers’ debts at a reduced amount of money. Debt settlement companies use third-party service – a settlement fund is usually managed by an independent, third-party payment processor.

Clients should be aware of the fact that not all the types of debt can be negotiated in a debt settlement company. It’s common for a debt settlement company to negotiate unsecured debts. Secured debts (like home and car loans) cannot be negotiated because the creditor can repossess the item purchased with credit issued to the borrower.