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Debt Settlement: How It Works, FAQs And More

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Household debt statistics ebb and flow over the years, but debt never completely goes away. As of January 2020, 41.2% of U.S. households have credit card debt. The average among American households carrying a balance is $9,333.

But whether you’re buried under credit card, medical or another type of debt, one option you might be considering is debt settlement. This form of debt relief can help you erase your unpaid balances – but it isn’t guaranteed and can mean costly consequences for both your credit and wallet.

What is debt settlement?

Debt settlement is the process of hiring a company to negotiate with your creditors to reduce or erase your balances. You may also do it yourself. (More on that below.)

When you hire a debt settlement company, you’ll be asked to deposit a certain amount of money in a savings or escrow account each month. (The account will belong to you.) As you build your savings, the debt settlement company will generally advise you to stay delinquent with your creditors. That means you’ll continue to accrue fees, such as for late payment on your debts – hurting your credit in the meantime.

Once your savings account accumulates a high enough balance, the debt settlement company will begin negotiating with your creditors to settle the debt. If your creditors agree to settle, the payoff amount will be taken out of the savings account.


Fees for debt settlement programs can be difficult to find on company websites. However, most consumers can expect fees to range from 15% to 25% of the total debt they enroll in the program. Fees are charged against successfully settled debts, but may also include fees for any third-party managed savings account that is part of the program.

Pros and cons of debt settlement

Is debt settlement a good idea



  • Can reduce your total balances due
  • Simplifies monthly bill payment
  • May help you avoid bankruptcy
  • Could take less time to finalize than Chapter 13
  • Fees can be costly
  • You generally need to be behind on payments and remain delinquent, accumulating late fees
  • Remaining behind on payments will negatively impact your credit
  • No guarantee that your creditors will accept the settlement offer
  • Canceled debt may be treated as taxable income

Working with a debt settlement company

  • Evaluate debt settlement companies. This starts by comparing the fees and claims of each company. Debt settlement can be risky as it isn’t guaranteed, so it’s critical to compare fees. Additionally, since there is no guarantee that a creditor will accept the settlement, it’s a good idea to review each company’s claims to ensure you’re dealing with one that sets reasonable expectations.Next, evaluate the company’s process as well as their terms to make sure you qualify. For any company you work with, you should retain control over the funds. Some companies begin making settlement agreements as soon as the funds build up, others wait.
  • Research debt settlement companies. After you’ve narrowed down your choices, check on the company’s compliance and other user experiences. You can visit the Better Business Bureau and ensure the companies are members of the American Fair Credit Council and the International Association of Professional Debt Arbitrators.
  • Establish agreement/account. Upon selecting a company to work with, visit their website to open an account. Be prepared to give your name, phone number, email address and the total amount of credit card debt.
  • Start saving money according to your plan. Once the company reviews your debt, they will propose a savings plan that you should follow. This will require you to make a single deposit into an account usually managed by a third party.
  • Saved funds are disbursed. When the company begins making settlement agreements, the funds will be distributed from the account, paying off both debts and settlement company fees.

How to settle debt on your own

1. Figure out which accounts are past due

If you’ve secured money through a loan, savings or inheritance and you want to leverage that to settle your debt, you don’t have to hire a debt settlement company. Instead, you can take care of it yourself or hire a lawyer to handle the negotiations.

For a debt settlement offer to be appealing to creditors, you likely need to be behind on payments. Rather than stopping payments on your current debt, make a list of the debts you are already behind on.

Next check the statute of limitations on that past-due debt. If you have debt that’s past the statute of limitations, then you can no longer be sued by the creditor to collect. If you decide to make a partial payment on debts that are past the statute of limitations, it might restart the clock on the statute.

2. Save money, and determine how much you can pay

Before contacting your creditors to make a settlement offer, determine what kind of lump sum or payment plan agreement you can stick to. The goal is not only to pay off the settled debts but to stay current with all your other bills and ensure you have enough of a cushion to deal with potential emergencies.

If you don’t have a lump sum of money to offer for debt settlement

3. Contact your creditors

Creditors need to agree to reduce your debt balance as part of your settlement offer. To find out which creditors are amenable to debt reduction, contact all those whose payments you’ve fallen behind on. Because you want everything documented, this contact should be made in writing, although you can call the company as well.

In some cases, this debt may have already been transferred to a collection agency. If that’s the case, verify which collection agency has taken the debt and contact them.

4. Write a debt settlement letter

Once you know which creditors are willing to settle, write a debt settlement letter spelling out the details of the agreement. This letter should include:

  • The account number
  • The reason you want to settle the debt
  • The current balance
  • The proposed settlement amount or restructured payment plan
  • The deadline for the settlement payment or starting date for the payment plan

Sample debt settlement letters

Alternatives to debt settlement

Debt management plans

Nonprofit credit counseling organizations often offer what’s called a debt management plan. This is a strategy in which the credit counseling agency works with creditors to reduce your interest rates and create payment plans that work with your budget. You then make a single monthly payment to the agency and have a payoff date within three to five years.

A debt management plan may come with a monthly fee as well as a setup fee. However, these fees may be worthwhile, as the credit counseling agency will work to have late fees and other kinds of fees waived on your debt.

Debt consolidation

If you don’t like the idea of keeping your debts unpaid for debt settlement, you can instead consider debt consolidation. You can accomplish this by either:

  • Working with a nonprofit credit counselor to create a debt management plan; or
  • Getting a personal loan, balance transfer card or equity loan to pay off all creditors, thus reducing your repayments to a single lender and due date.


Debt settlement is often chosen as a way to avoid bankruptcy, but in some situations, bankruptcy could be a better option.

  • With Chapter 13 bankruptcy, a three- to five-year payment plan can mean that your debts are settled and your secured assets protected with a court-approved payment plan and possibly lower debt balances.
  • With Chapter 7 bankruptcy, many unsecured debts can be discharged without payment, so you might save even more money. Since credit cards are unsecured debt, Chapter 7 can be a better choice than credit card debt settlement.

With either type of bankruptcy, collection actions are stopped, along with garnishments. This can provide a welcome relief to those being hounded by debt collectors.

FAQ: Debt settlement

A debt that’s been settled will show as such for up to seven years on your credit report. In addition, late payments of 30 days or more can remain on your credit report for up to seven years.

Because debt settlement generally requires you to remain past due on payments, it can have a detrimental effect on credit. Missing more than one payment, which is typical for debt settlement, can have an even greater impact.

Taking a settlement in and of itself is not necessarily a bad thing, although it will show up on your credit report. There can be tax consequences on the forgiven debt, so make sure you’re ready to pay those. Settlements also generally require you to be past due on payments, which also has a negative effect on your credit score.

Debt settlement companies often claim reductions of 30% to 70%. This does not include fees paid to the settlement company.

To qualify for debt settlement, a creditor generally must be enduring a financial hardship that has put them behind on payments. They must also meet the company’s debt balance requirements.

Debt settlement companies often claim to have an advantage with creditors by handling a large volume of customer debt through bulk negotiations. This could mean you have better odds of having your agreement accepted when you use one. However, you may save money by handling it on your own.

Avoid companies that charge in advance or that guarantee results. Check the Better Business Bureau for complaints and make sure the company is compliant with the Federal Trade Commission.

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Strategies to Save

Understanding the Various Types of Deposit Accounts

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

A deposit account is an account at a bank or credit union that allows you to safely and easily manage your money. Deposit accounts fall into two major categories: demand deposits and time deposits.

Demand deposit accounts, which include checking and savings accounts, may let you withdraw up to the full amount of your savings at any time without gaining permission from the bank or credit union. Time deposits, like CDs, restrict your access to funds for a set time period.

What are the types of deposit accounts?

The two key features of deposit accounts

All deposit accounts offer two primary features: security and interest.


When deposited into an insured financial institution, your money is protected in the event of bank failure up to the legal amount per account by the Federal Deposit Insurance Corporation (FDIC), or up to the legal amount per credit union account by the National Credit Union Administration (NCUA). Joint accounts with two account owners get double the protection from the FDIC or NCUA. You can find out if the bank you’re considering is insured by the FDIC here.


You’re not just putting money into a deposit account to keep the funds safe — you also want to be rewarded for letting the bank hold your money. After all, banks and credit unions use funds held in deposit accounts to make loans to other customers, and earn profits. Interest payments is how banks and credit unions reward their deposit account customers, and incentivize them to keep funds in their accounts.

The longer you leave your money and earn interest in the bank, the greater the interest the account will earn. This is called “compound interest.” Depending on the bank and the account, interest may compound on a quarterly, monthly, weekly or daily basis. The more often interest compounds, the faster your balance grows.

When comparing prospective deposit accounts, you’ll want to review the annual percentage yields (APY). The APY advertised by your bank or credit union is the amount of interest you’ll earn in one year — the APY factors in the interest rate on the account as well as how often it compounds, so comparing APYs is the best way to compare the earning potential of different accounts.

Features of the main types of deposit accounts

These are the five main kinds of deposit accounts — let’s take a look at how they work and when you need them.

Checking accounts

Checking accounts are demand deposit accounts that let you deposit or withdraw money whenever you want. A checking account provides easy access to your money via paper check, ACH transfer, debit card, or cash withdrawal at a branch or ATM.

Some checking accounts pay interest, with our list of best accounts available paying upwards of 4.00% APY or more, as long as minimum balance requirements are maintained. But note that many checking accounts pay minimal or even zero interest, and regulations do not require institutions to offer interest payments on checking accounts.

Checking accounts may charge fees, including monthly maintenance charges; however, fees may be waived if you maintain a minimum balance or set up recurring direct deposits. You can be charged for money orders or cashier’s checks, and there may be limits on the amount you can withdraw in a given day or per ATM visit. Writing checks or swiping your debit card for amounts you don’t have can result in costly penalties like overdraft fees, insufficient-funds fees, or returned-check fees.

When to open a checking account

  • Checking accounts are one of your most important personal finance tools. This is where you manage the money you earn and spend on a day-to-day, week-to-week basis.
  • If you’re earning a low APY or earning no APY on your checking account, now might be the right time to examine your options. There are plenty of high-yield checking accounts available on the market today.
  • Look for checking account with zero fees. There are simply too many zero-fee options for you to be paying monthly account fees for your checking account.

Savings accounts

Savings accounts are demand deposit accounts that offer interest on your balance. Interest may be compounded daily, weekly, monthly, or annually. The benefits of savings accounts can vary widely based on requirements for a minimum opening deposit, monthly service fees, interest rates, and how the interest is calculated.

Savings accounts aren’t meant to offer the ease and frequency of access you get with checking accounts, but some do offer debit cards and even checkbooks. The Federal Reserve’s Regulation D mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. If you exceed your transaction limit, the bank may charge you a fee, close your account or convert it to a checking account, so check with your bank about requirements and penalties.

When to open a savings account

  • You may want to look into moving your savings into a high-yield savings account if you can get a better rate than what you’re earning with your current savings account.
  • When considering a new savings account, look for the highest possible APY you can find — most often, that means looking at our list of online savings accounts, which we have found consistently offer the best rates in the business.
  • Skip accounts with any monthly maintenance fees, as they eat into your returns. Also keep an eye on minimum balances to earn the highest possible APY.

Money market accounts

A money market account (MMA) is a high-yield deposit account that offers interest rates very similar to those offered by savings accounts. Money market accounts often provide access to your funds via debit cards or checks. However, like savings accounts, they too are subject to Regulation D which mandates certain types of telephone and electronic withdrawals, including transfers from savings accounts up to 6 per statement cycle. You should check with your credit union or about any transaction limits and potential penalties. Minimum deposit requirements for MMAs are frequently higher than those for savings accounts.

When to open a money market account

  • Money market accounts have many of the same benefits and restrictions as savings accounts. MMAs generally require higher minimum deposits to open than savings accounts, and in exchange for that, you may be able to secure a higher APY. If you have a large sum you wish to keep as a liquid asset, a money market account may be your best option.
  • If you need easy access to your funds, a debit card or even a checkbook can be reasons to choose an MMA — although many savings accounts offer these conveniences as well.
  • Like with savings accounts, you need to understand the minimum balance required to earn the account’s highest advertised APY.

Certificates of deposit

Certificates of deposit (CDs) offer a way to earn higher rates of interest than those offered on savings accounts. CDs are time deposits, with common terms between one month and ten years. With a CD, you cannot withdraw money before the CD matures without incurring a penalty.

Penalty rates vary across the industry and by CD term length, but penalties generally amount to losing some or most of the interest you’ve earned on your investment at the time you withdraw. The interest rates are fixed over the term of the CD. The CD may automatically renew upon the maturity of the original deposit, so check with your bank or credit union for details.

CDs are insured by participating institutions up to the legal amount per account, per institution by the FDIC for banks and the NCUA for credit unions. Larger principal deposits and longer terms may fetch more competitive rates, although investors need to be sure they are comfortable losing access to their money for long durations.

You can stagger multiple CD maturity dates to create a CD ladder as a way of maintaining liquidity, capitalizing on increasing rates, and hedging against falling rates.

When to open a certificate of deposit

  • CDs are only a good option if you don’t need access to your money for whatever term you choose — either a short-term certificate with a term numbered in months, or a long-term CD lasting years.
  • Some CDs offer higher interest rates than savings accounts. Again, though, you must be prepared to leave your funds untouched for the term of the CD. Beware of high penalties for early withdrawals, before the end of the CD’s term.
  • Locking your money up in CDs could be a good strategy when market interest rates are falling: You can maintain a higher APY while other deposit accounts see declining rates. Conversely, they might not be the best choice when market rates are rising: By locking in a CD, you might miss out on higher APYs on other deposit accounts from higher rates.

Individual retirement account CDs

Individual retirement accounts (IRAs) are tax-advantaged vehicles designed to help people save for retirement. With an IRA CD, you may use funds saved in your IRA to invest in designated CD products. Credit unions, banks and brokerage firms offer IRA CDs, available as either traditional IRAs or Roth IRAs.

IRA CDs share most characteristics with regular CDs. IRA CDs may renew automatically like traditional CDs, so it’s important to keep track of your CD maturity dates so you can make educated investment decisions when the CD term ends. Keep in mind that deposits into an IRA account are subject to annual IRA contribution limits.

Like regular CDs, IRA CD investors need to beware of early-withdrawal penalties. Not only are there penalties for withdrawing from the CD before it matures, but if you remove the funds from your IRA, there is an IRS tax penalty of 10% on any distribution you take before you reach 59½ years of age. Still, the IRS may waive early distribution penalties for certain situations, such as a withdrawal of funds applied to a first-time home purchase.

When to open an IRA CD

  • IRA CDs are a great option for conservative retirement investors who want a decent rate of interest, without exposure to volatile stock or bond markets. 
  • Unlike stock and bond investments in IRAs, IRA CDs are insured by the FDIC and NCUA up to the legal amount per account, per institution.
  • Like standard CDs, IRA CDS prevent you from accessing principle for whatever term you choose.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Can I Get a No Income Verification Mortgage?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.


When you apply for a mortgage, it is the lender’s job to make sure you can afford it. However, this wasn’t always the case. Between 2003 and 2006, a substantial percentage of mortgages were made without documentation or with little documentation.

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Today, the story is quite different. So-called “no-doc” mortgages have all but disappeared from the industry. In this article, we’ll take a look at why no-documentation loans have lost favor and what options there are for people who have difficulty meeting traditional documentation of income and asset requirements.

The idea behind no-documentation mortgages

To qualify a mortgage, you generally need to let your lender know what your income and assets are, so the lender can determine whether you are able to pay back the loan. You’re usually asked to back up your numbers with proof in the form of your W-2s, tax returns and bank statements.

But there are some borrowers whose financial and employment situations make these kinds of documents hard to come by. These can include the self-employed, people who rely on investment income and even salespeople working on commission.

For these people and many others, proving income can be more difficult — maybe even impossible. This is why lenders began to develop a mortgage underwriting process that didn’t require proof of income, also known as as a no-documentation loan. It’s also sometimes called a stated income loan, because the borrower’s income is stated, but not proven.

However, as housing prices continued to climb in the early 2000s, the use of no-documentation and low-documentation loans spread.

“No-documentation loans are a product that was created for one purpose and started getting used for another purpose,” said Tendayi Kapfidze, chief economist at LendingTree, MagnifyMoney’s parent company. “And that led to a lot of trouble.”

No-documentation loans and the mortgage crisis

While many people understand the role that subprime mortgages played in the mortgage crisis, they may not realize mortgages issued without financial documentation also played a role.

One reason so many no-documentation loans were issued is that lenders and buyers all expected real estate prices to continue to rise, which in turn would result in increased equity. That equity would allow buyers to eventually refinance into loans they could actually afford to pay; it didn’t matter as much whether the borrower could pay back their original mortgage. “New buyers were less and less prepared for homeownership,” Kapfidze said.

When housing prices fell during 2007, many no-documentation buyers ended up underwater in loans they couldn’t pay. Meanwhile, lending standards tightened, removing the possibility of refinancing, eventually more than doubling the foreclosure rate across the country.

Dodd-Frank and the fall of no-documentation loans

No-documentation mortgages are mostly not an option for borrowers today — that’s thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act resulting from the financial crisis. One part of this law requires that lenders ensure a consumer’s ability to repay a mortgage loan before approving them. The Dodd-Frank Act’s “ability-to-repay” rule lists eight criteria that underwriters are required to consider when measuring a borrower’s capacity to afford a potential loan.

  • Income and assets
  • Employment status
  • Monthly payment
  • Debts
  • Alimony
  • Child support
  • Credit history
  • Residual income

The Dodd-Frank act further states that a lender is required to verify these criteria using third-party resources that are “reasonably reliable.”

Getting a no-documentation home loan today

Though no-doc loans are mostly gone, there are still some flexible mortgage options available for people who have problems proving their income.

The first step to getting a “stated-income” loan in today’s lending environment is to be the right type of borrower, and that means having a high credit score and a large down payment. These stated income loans aren’t exactly like their no-documentation predecessors — they require a peek at a borrower’s assets in order to satisfy the ability-to-repay requirement, usually in the form of bank statements or portfolio statements.

In rare cases, going through a private lender could also provide an alternative option. Individuals, estates and trusts that act as mortgage originators for three or fewer properties in a year can be exempt from the ability-to-repay requirements.

In either case, be prepared to pay a higher interest rate — because of the risk associated with this type of lending, borrowers may pay a higher interest rate when securing a stated-income loan.

“As long as it’s used carefully, it can be a good loan product,” Kapfidze said.

Improving your chances of loan approval

Having a hard-to-prove income history doesn’t have to stand in the way of your homeownership aspirations. There are other things you can do to better your chances of getting a loan.

Maintain a high credit score. By keeping your debts low, paying on time, and limiting the amount of new credit you apply for, you can achieve and maintain a high credit score. The higher your credit score, the lower the risk you are to a lender. A high credit score makes you more likely to get approved and to get more favorable loan terms.

Manage your debt-to-income ratio. Your debt-to-income ratio is a measure of your current monthly debt repayments against your income. The lower the ratio is, the more income you have to take on new debts, and the more favorably a lender will look at you. For a loan to meet the general qualified mortgage status, a borrower needs a debt to income ratio no higher than 43%.

Save up for a larger down payment. The higher a down payment you can afford, the less you’ll need to borrow and the less risk the lender takes on; this makes approval easier.

Watch your business deductions. Business owners generally look to their expenses as a way of lowering their overall income and, as a result, their tax liability. But this lower income can actually hurt them when it comes to applying for a mortgage — instead, business owners may want to limit the types of deductions they take in the two years leading up to their home purchase.

Prepare your documents. If you already know that confirming your income is going to be difficult, consider spending some time prepping the documentation that underwriters may ask for. This includes gathering two years of tax returns, bank statements, portfolio statements, retirement account statements, and letters of explanation to describe reasons for credit report gaps and negative factors.

What the future may bring for alternative mortgage documentation options

If you’re hoping for a resurgence of low- and no-documentation loans in the coming years, don’t hold your breath. “It was an innovation that proved itself to not work well under duress,” Kapfidze said.

But that doesn’t mean lenders won’t develop more creative, yet compliant, ways to evaluate a borrower’s income and determine their ability to repay. In the coming years, we could see more options — “I think there will probably be some innovations in that space,” Kapfidze said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.