What does “Settling your Debt” entail, and how does it compare to other options?
If you are struggling with debt and cannot realistically pay your debts off with your current level of income, these businesses offer, for a fee, to negotiate with your debt providers a sum that you can realistically afford to pay. The debt providers will consider the offer because they would rather get some money back rather than nothing (as these are usually unsecured loans). For you it can be a better deal than going bankrupt or trying to struggle endlessly to pay off something you can't afford to pay off. Note, that even though you won't be bankrupt, you will be treated (by lenders) very similar to being bankrupt. In other words, it will be very hard for you to get new loans in the near future. "Basically, these guys break all your eggs then try to make an omelet.  Your lender(s) must really believe that you have no ability to pay before they'll settle, which generally entails not paying them until your creditworthiness is in the tank.  Bankruptcy laws exist for a reason.  If your credit is in the tank, you can't make your payments and you're shopping to settle your debts, it's not likely a bankruptcy would worsen your situation; in fact, quite the opposite.  But, people have hugely negative feelings toward bankruptcy and don't want to be called a ""deadbeat"", these services prey on those people." "These agencies consolidate your debt and make it an easy monthly instalment for you. They also try to negotiate with credit cards. They do so for a fee. Other option is to not pay the debt. During this time , expect credit cards to keep sending you bills and reminders and ways to contact you. Once it is not paid for a significant amount of time ( 18 months ) , the lender will ""sell"" your debt to a collection agency. You will start getting bills from collection agencies. Collection agencies can settle for up to 40 % of the actual debt. So if you had 5 credit cards , you would have 5 different collection agencies trying to get in touch with you. You can call them and tell them that you cannot pay the full amount. They will offer you settlements which you can accept or decline. The longer the unpaid debt , the more the discount they will offer. One very important thing to remember is that the unpaid amount will be sent to you on a 1099-c form . This means you have to recognize this as income. It is applicable to the year when the debt is settled. In a nut shell , you owe 120,000. You don't pay. Credit cards keeps calling you. You don't pay. After 12-18 months , they handover your debt to collection agencies. Collection agencies will try to get in touch with you. Send you lawsuit letters. You call and settle for say 50,000. You pay off 50,000 in 2016. Your debt is settled. But wait you will get 1099-C forms from different agencies totaling 70,000 ( unpaid debt ). You will have to declare that as income and you will owe tax on that. Assuming say 30 % tax you will have to pay up 21,000 as tax to IRS assuming no other income for simplicity. SO what you did was pay up 50 + 21 = 71,000 and settled the debt of 120,000. Your credit score will be much better than if you never paid at all."
Short-term,  getting a balance transfer will help. It'll reduce the interest you pay. You can also reduce the interest you pay on your cars if you are able to consolidate your debt into a personal loan. To your question about debt consolidation companies, as far as I know, that's all they do.  However, long-term, there's only two ways to stay on top of debt: increase your income, or reduce your spending.  Basically, if you can't or won't get a raise or a job that pays more (or a second job), you need to cut back on your spending.  You might need to do something radical, like move somewhere with cheaper rent (as long as increased travel costs doesn't offset the saving). But you'll be much better off in the long run if you step back and take a look at your situation now, and make adjustments accordingly. "Yes, your debt goes up by that amount. It becomes part of the loan, and you'll pay interest on it. That's what ""capitalization "" means. It's not a bill because you don't have to pay it. We'll, not yet…" "First to actually answer the question ""how long at these rates/payments?""-  These is nothing magic or nefarious about what the bank is doing. They add accrued interest and take your payment off the new total.  I'd make higher payments to the 8.75% debt until it's gone, $100/mo extra and be done. The first debt, if you bump it to $50 will be paid in 147 months, at $75/mo, 92 months. Everything you pay above the minimum goes right to the principal balance and gets you closer to paying it off.  The debt snowball is not the ideal way to pay off your debt. Say I have one 24% credit card the bank was nice enough to give me a $20,000 line of credit on. I also have 20 cards each with $1000 in credit, all at 6%. The snowball dictates that the smallest debt be paid first, so while I pay the minimum on the 24% card, the 6% cards get paid off one by one, but I'm supposed to feel good about the process, as I reduce the number of cards every few months.  The correct way to line up debt is to pay off the (tax adjusted) highest rate first, as an extra $100 to the 24% card saves you $2/mo vs 50 cents/mo for the 6% cards. I wrote an article discussing the Debt Snowball which links to a calculator where you can see the difference in methods. I note that if the difference from lowest to highest rate is small, the Snowball method will only cost you a small amount more. If, by coincidence, the balances are close, the difference will also be small.  The above aside, it's the rest of your situation that will tell you the right path for you. For example, a matched 401(k) deposit should take priority over most debt repayment. The $11,000 might be better conserved for a house downpayment as that $66/mo is student loan and won't count as the housing debt, rather ""other debt"" and part of the higher ratio when qualifying for the mortgage. If you already have taken this into account, by all means, pay off the 8.75% debt asap, then start paying off the 3% faster. Keep in mind, this is likely the lowest rate debt one can have and once paid off, you can't withdraw it again. So it's important to consider the big picture first.  (Are you depositing to a retirement account? Is it a 401(k) and are you getting any matching from the company?)" I would sit down with the creditors and negotiate smallest amount you can get before agreeing with whatever you have to pay. Think that, for them, it's much more convenient to get way less than $36K than to see you in collections. Needless to say, don't tell them you have to money to cancel off :-) I am not a structured products expert, just relaying what's in the article, but I'd imagine it includes a larger equity tranche in the structured product, thereby giving more cushion against losses to the actual debt investors in the tranches above it in the payment water fall. Finding a way to pay down credit debt is important, because you're probably paying in the high teens in APR. 401k should be last resort. Have you researched other options? E.g loan consolidation  If you don't mind me asking, how did you get that far in debt? You signed a contract to pay the loan.  You owe the money.   Stories of people being arrested over defaulted student loans are usually based in contempt of court warrants when the person failed to appear in court when the collection agency filed suit against them. Explore student loan forgiveness program. Research collections and bankruptcy and how to deal with collection agencies.  There are pitfalls in communicating with them which restart the clock on bad debt aging off the credit report, and which can be used to say that you agreed to pay a debt.  For instance, if you make any sort of payment on any debt, a case can be made that you have assumed the debt.  Once you are aware of the pitfalls, contact the collection agency (in writing) and dispute the debt.  Force them to prove that it is your debt.  Force them to prove that they have the right to collect it.  Force them to prove the amount.  Dispute the fairness of the amount.   Doubling your principal in 6 years is a bit flagrant.   So, work with the collectors, establish that the debt is valid and negotiate a settlement.  Or let it stay in default. Your credit report in the US is shot.  It will be a long time before the default ages off your report.  This is important if you try to open a bank account, rent an apartment, or get a job in the US.  These activities do not always require a credit report, but they often do.  You will not be able to borrow money or establish a credit card in the US. Here's a decent informational site regarding what they can do to collect the loan.  Pay special attention to Administrative Wage Garnishment.  They can likely hit you with that one.  You might be unreachable for a court summons, but AWG only requires that the collectors be able to confirm that you work for a company that is subject to US laws. Update:  I am informed that federally funded student loans are not available to international students.  AWG is only possible for debts to the federal government.  Private companies must go through the courts to force settlement of debt.  OP is safe from AWG. "TLDR:  There are no to few monetary downsides. The process of settling an estate is called probate.  Creditors can make claims against the estate, and assets should stand to pay any debts.  If more debts are owed then assets, the beneficiaries are not held liable.  Final expenses are usually the first amount paid out in full.  So if the estate only contains enough assets to pay final expenses, then the creditors receive nothing.  Usually creditors are paid pro-rated if there is not enough to cover debts. For the record, the probate process is greatly simplified if one has a will.  Get a will if you don't have one. Life insurance is a bit different though.  It passes directly to the beneficiaries and depending on the state could be untouchable by creditors. The same thing could also happen with retirements accounts.   With 401K accounts, you could take some of it out, and pay tax on that.  You could also roll it into your own account. Property receives a really good benefit.  While it does pass through probate the cost basis of real estate is reestablished at the time of death.  So if grandpa bought a house for 30K in the 40's, and it is now worth 120K.  You inherit a 120K piece of property and when you sell you use 120K as your cost basis not 30K.   Any estate taxes are typically paid by the state, not technically the heirs.  If there is a 5% estate tax and they are to inherit 100K, they will only receive 95K.  They will not receive 100K then be expected to be paid 5K.  ""Electrically"" the same, but a large difference in responsibility. The biggest downside is if you have a will fight on your hands.  If someone disputes the validity of the will that can incur a lot of legal fees.  For small estates, it may not be worth the fight.   The next is if any assets do go through probate.  The process is lengthy and depending on the executor, they could reduce the size of the estate for charging for their time." "Allen, welcome to Money.SE. You've stumbled into the issue of Debt Snowball, which is the ""low balance"" method of paying off debt. The other being ""high interest."" I absolutely agree that when one has a pile of cards, say a dozen, there is a psychological benefit to paying off the low balances and knocking off card after card. I am not dismissive of that motivation. Personal Finance has that first word, personal, and one size rarely fits all. For those who are numbers-oriented, it's worth doing the math, a simple spreadsheet showing the cost of the DS vs paying by rate.  If that cost is even a couple hundred dollars, I'll still concede that one less payment, envelope, stamp, etc, favors the DS method. On the other hand, there's the debt so large that the best payoff is 2 or 3 years away. During that time, $10000 paid toward the 24% card is saving you $2400/yr vs the $500 if paid toward 5% debt. Hard core DSers don't even want to discuss the numbers, strangely enough.  In your case, you don't have a pile of anything. The mortgage isn't even up for discussion. You have just 2 car loans. Send the $11,000 to the $19K loan carrying the 2.5%. This will save you $500 over the next 2 years vs paying the zero loan down. Once you've done that, the remaining $8000 will become your lowest balance, and you should flip to the Debt Snowball method, which will keep you paying that debt off.  DS is a tool that should be pulled out for the masses, the radio audience that The David (Dave Ramsey, radio show host) appeals to. They may comprise the majority of those with high credit card debt, and have greatest success using this method. But, you exhibit none of their symptoms, and are best served by the math. By bringing up the topic here, you've found yourself in the same situation as the guy who happens to order a white wine at a wedding, and finds his Mormon cousin offering to take him to an AA meeting the next day.  In past articles on this decision, I've referenced a spreadsheet one can download. It offers an easy way to see your choice without writing your own excel doc. For the situation described here, the low balance total interest is $546 vs $192 for the higher interest. Not quite the $500 difference I estimated. The $350 difference is low due to the small rate difference and relatively short payoffs. In my opinion, knowledge is power, and you can decide either way. What's important is that if you pay off the zero interest first, you can say ""I knew it was a $350 difference, but I'd rather have just one outstanding loan for the remain time."" My issue with DS is when it's preached like a religion, and followers are told to not even run the numbers. I wrote an article, Thinking about Dave Ramsey a number of years back, but the topic never gets old." TL/DR  Yes, The David popularized the Debt Snowball. The method of paying low balance first.  It's purely psychological. The reward or sense of accomplishment is a motivator to keep pushing to the next card.  There's also the good feeling of following one you believe to be wise. The David is very charismatic, and speaks in a no-nonsense my way or the highway voice. History is riddled with religious leaders who offer advice which is followed without question.  The good feeling, in theory, leads to a greater success rate. And really, it's easier to follow a plan that comes at a cost than to follow one that your guru takes issue with.  In the end, when I produce a spreadsheet showing the cost difference, say $1000 over a 3 year period, the response is that it's worth the $1000 to actually succeed. My sole purpose is to simply point out the cost difference between the two methods. $100? Go with the one that makes you feel good. $2000? Just think about it first.  If it's not clear, my issue is less with the fact that the low balance method is inferior and more with its proponents wishing to obfuscate the fact that the high interest method is not only valid but has some savings built in. When a woman called into The David's radio show and said her friend recommended the high rate first method, he dismissed it, and told her that low balance was the only way to go.  The rest of this answer is tangent to the real issue, answered above.  The battle reminds me of how people brag about getting a tax refund. With all due respect to the Tax Software people, the goal should be minimizing one's tax bill. Getting a high refund means you misplanned all year, and lent Uncle Sam money at zero interest(1). And yet you feel good about getting $3000 back in April. (Disclosure - when my father in law passed away, I took over my mother in law's finances. Her IRA RMD, and taxes. First year, I converted some money to Roth, and we had a $100 tax bill. Frowny face on mom. Since then, I have Schwab hold too much federal tax, and we always get about $100 back. This makes her happy, and I'll ignore the 27 cents lost interest.)  (1) - I need to acknowledge that there are cases where the taxpayer has had zero dollars withheld, yet receives a 'tax refund.' The earned income tax credit (EITC) produces a refundable benefit, i.e. a payment that's not conditional on tax due. Obviously, those who benefit from this are not whom I am talking about.  Also, in response to a comment below, the opportunity cost is not the sub-1% rate the bank would have paid you on the money had you held on to it. It's the 18% card you should be paying off. That $3000 refund likely cost over $400 in the interest paid over the prior year. Sounds like you are drowning in debt. Why not just stop paying? It will ruin your credit, but eventually you might be able to settle for much less than you owe and a reasonable interest rate. You will then have a long road to recover you credit, but IMHO this road is much longer and stressful. Hey, you are paying a high interest rate because you are EXPECTED to default. If you were expected to pay back your rates would be lower! People who provide services like that are called debt councilors or debt advisors. They help you to organize your debts, advise you in prioritizing them and also help you to negotiate or legally challenge any unreasonable levies. This depends on the loan calculation methodology. If it is on reducing balance then yes. Else not much difference This is pretty simple in theory, harder to do in practice. You will be surprised how quickly the debt will disappear.  Doing these things will work, I know from experience. It appears that co-signing does impact your debt-to-income ratio, at least in the US.  An article on Kiplinger says: An article on Forbes agrees saying: There is a similar question here.