Definition
Negotiating with a creditor to accept less than the full balance as final payment, usually on debt that is already deep in delinquency. Done directly or through for-profit settlement companies that charge substantial fees.
Why it matters
Settlement can shrink a hopeless balance, but the costs are real: deep credit damage, possible lawsuits while you save up the offer, fees, and taxes, since forgiven debt is generally taxable income. It is a last resort short of bankruptcy, not a discount program.
Example
A $10,000 charged-off balance settles for a $4,500 lump sum. The account is marked settled rather than paid in full, the score takes a lasting hit, and the $5,500 of forgiven debt may show up at tax time as taxable income on a 1099-C.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.