The History of Debt SettlementDebt settlement is a method by which consumers with overwhelming amounts of unsecured debt (such as that incurred through the use of credit cards, as opposed to mortgages, car loans, or student loans) can negotiate a reduced balance with their creditors, providing debt relief. In return for lowering the total amount owed, sometimes by as much as 60 or 70%, creditors then receive either a lump sum or an agreement on the part of the debtor to commit to a repayment plan.

It makes good financial sense for both the credit card company and the defaulted card holder to enter into such an agreement. The creditor generally recoups more money through debt settlement than if the debtor were to file bankruptcy, in which case the debt would remain unpaid. Other methods of debt collection, such as selling the debt for pennies on the dollar to a collection agency, are also less satisfactory to creditors.

The debtor also benefits from debt settlement. Not only are they now obliged to pay a lower amount than what was originally charged, but they also avoid the stigma of filing for bankruptcy and stress of being hounded by collection agencies. Although a temporary dip in their credit rating may result from debt settlement, in the long run the consumer can begin to rebuild his or her credit and regain financial responsibility.

Although this approach - in which a creditor agrees to forgive part of a debt if the other part is paid off - has been around since credit was first extended, it became more widespread in the latter decades of the 20th century. At that time, bank deregulation and looser consumer lending practices, coupled with economic recession, led to financial difficulties for many consumers.

Additionally, in 2005, legislation made it more difficult for individuals to file Chapter 7 bankruptcy–where all debts are erased. Instead, most candidates for bankruptcy would qualify only for Chapter 13, and therefore be obliged to pay back some part of their debts, depending on their ability to pay and IRS guidelines.

The current economic crisis is also adversely affecting consumers, who may be using their credit cards for daily expenses rather than for luxury items, even as they are becoming increasingly unable to pay their current balances. Debt settlement, an alternative to bankruptcy, is poised to become even an more popular option for the millions of consumers who find themselves struggling to pay high amounts of unsecured debt.