Which Debts Can Be Settled (and Which Can't)?
The following is presented for informational purposes only and is not intended as legal advice.
There are basically three levels of debt stress:
- Level 1 is when you're managing things just fine, but you'd greatly prefer it if you didn't have to dedicate so much of your budget to debt payments. Maybe you decide to tough it out. Maybe you decide to change things up with a balance transfer. Nothing major.
- Level 2 is when you're actively not okay and you can't keep doing things the way you've been doing them. This is the "talk to a credit counselor and see what your options are" stage.
- Level 3 is when you're genuinely considering whether or not you should move to a cabin in the woods just to get away from all the debt collection calls. It's bad bad.
When things have gotten Level 3 bad, you may be considering more drastic options, like bankruptcy or debt settlement. These are the options that have some significant drawbacks, especially when it comes to your credit, but once things have gotten this bad you're probably past the point of worrying about your credit (or what's left of it).
Settling your debt allows you get out of debt while repaying less than what you owe. When repaying your debts in full just isn't possible, it's a valid way to clear the deck and let you start rebuilding your finances. That said, not every type of debt can be settled. So if you're considering debt settlement, here's what you need to know about which debts can (and can't) be settled.
Can I settle this debt?
| Debt type | Can you settle? | Details |
|---|---|---|
| Credit card debt | Yes | The most common kind of debt to settle; typically requires that debts be charged off; can negotiate directly or work with a third party. |
| Medical bills | Yes | Hospitals and providers often agree to reduced payments, especially if financial hardship is documented. |
| Personal loans (unsecured) | Yes | Lenders may accept a partial payment if the loan is in default. |
| Private student loans | Sometimes | Some private lenders may settle if the loan is in default and can't be collected. |
| Store cards | Yes | Handled similarly to credit cards; often settled after the account is charged off. |
| Collections accounts | Yes | Debt collectors often buy debts at a discount and are willing to accept a lower payment to settle. |
| Auto loan | Rarely | If the car is repossessed and sold for less than the loan amount, the remaining balance can sometimes be settled. |
| Mortgage | Rarely | Similar to an auto loan, the mortgage is secured by the property (collateral). After foreclosure, any remaining deficiency balance can sometimes be settled. |
| Utility bills | Yes | Old, unpaid bills may be settled through the collections agency or directly with the utility company. |
| Payday loans | Yes | High interest loans can often be negotiated, especially if you’re facing legal or wage garnishment threats. |
| Judgments | Sometimes | If a creditor wins a lawsuit, they may accept a reduced lump sum to avoid collections or garnishment actions. |
| Federal student loans | No (rare exceptions) | Settlement is rarely offered and typically requires years of default or proven hardship. You'll be directed to income-based repayment or forgiveness programs first. |
| Child support | No | Considered a legal obligation; not open to settlement. |
| Alimony | No | Court-ordered support obligations can't be settled. |
| Tax debt (IRS) | Rarely | IRS offers limited settlement through “Offer in Compromise,” but qualification is strict. |
| Court fines and criminal restitution | No | These are legal penalties, not consumer debts, and can't be settled. |
Ultimately, settlement can be a hard road to navigate on your own and isn't available (or advisable) in all situations. If you've reached the point where traditional debt relief options aren't viable, consider a debt resolution plan (DRP) with MMI. It's a spin on debt settlement offered by a trustworthy nonprofit. We can help you negotiate a plan for as little as half of your starting balance.
