How to Respond to a Debt Settlement Offer

What To Do When a Creditor or Collector Reaches Out

woman sitting on the floor holding a phone to her ear
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Getting a settlement offer on a debt you couldn’t afford to pay in full may be the perfect opportunity to take care of an old account. You can avoid the anxiety of initiating the conversation with the creditor. Plus, you don't have to convince the creditor to settle because they’ve already made that decision.

Don’t get too excited about the prospect of finally being rid of this debt, though. Before you pay or even speak to anyone about the settlement (particularly a debt collector), you need to be sure the settlement offer is legitimate.

Consider Important Debt Time Limits

A settlement letter could be a debt collector ploy to get you to make one or more partial payments on a time-barred debt, that is one whose statute of limitations has expired. The payment would restart the statute of limitations, giving the collector more time to sue you for the debt. 


Review the statute of limitations for your debt before proceeding to determine whether settling the debt is worth it. If the statute of limitations has expired or is close to expiring, settling the debt may not be worth it.

The credit reporting time limit is also an important consideration for settling debts. If the debt is still being reported on your credit report, the settlement will impact your credit score. There’s less benefit to settling the debts that have fallen off your credit report since the blemish of an unpaid balance no longer exists.

Beware Scam Settlement Offers

It's important to be on the watch for fake settlement letters, sometimes even for fake debts. Before you pay any money on an unsolicited settlement offer, make sure you’re dealing with a legitimate company and that the debt is yours. Then, you can proceed with payment if that’s the action you want to take.

Spotting a fake settlement offer can be tough. Some signs the letter is not legit include misspelled words, improper grammar, vague references to "our client" or what happens after you settle, the absence of information about discharged debt being reported to the IRS, or directions to pay via wire transfer or another untraceable payment method. Fake settlement offers are more likely to come from collection agencies than from the original creditor.

Two Options for Taking the Settlement Offer

If you receive a settlement offer and decided you’re interested, there are a couple of ways you can respond. You can accept the settlement offer and pay the settlement account in full. This is the easiest and fastest way to deal with the debt, assuming you’ve received a legitimate settlement offer. Read the settlement offer carefully or have an attorney review the offer to be sure it’s legally binding – that the creditor or collector can’t come after you for the remaining balance at some point in the future.

Or, you can even try to negotiate a lower settlement. Your creditor may be willing to accept a lower settlement than the one offered in the letter. Because the door for settling the debt is already opened, you can use this opportunity to see if the creditor is willing to accept a lower payment. You'll have more leverage in your negotiation if you can pay the amount right away.


Before you make a payment, get the terms of the settlement in writing, on company letterhead with a signature from someone within the company who’s authorized to make this offer to you. Make sure the offer specifies that the remainder of the debt will be canceled after your payment.

If You Don't Want to Settle

You don’t have to take the offer. Maybe the settlement offer is too high or maybe you’re just not interested in paying off this debt at this time. In either case, you don’t have to respond to an offer you’re not interested in taking.

As long as the debt remains unpaid, creditors or their debt collectors may continue collection efforts including listing the debt on your credit report if it’s within the credit reporting time limit. You can stop communication from a third-party debt collector by sending a written cease-and-desist letter.

Tax Implications of Accepting a Settlement Offer

Note that if more than $600 of the debt is canceled with the settlement, there will be some tax implications for next year’s tax season. You may receive a 1099-C Cancellation of Debt form requiring you to list the canceled debt as income on your tax return. Make sure you include this notice with your other income and expense documents when you visit your tax preparer.

Frequently Asked Questions (FAQs)

What percentage of a debt is typically accepted in a settlement?

The percentage of debt for which you can settle varies by the amount of debt, its age, your income, and the creditor or debt settlement company involved. Debt settlement agreements often range between 30% and 60% of the total amount owed, but there will also be substantial fees on top of that amount.

How do you negotiate a debt settlement?

Just because you've determined that a debt is legitimate, it doesn't mean you have to accept the settlement offer outright. You're always free to negotiate, but you should be prepared and understand how debt negotiations work before you try it. You may be able to find leverage in the age of your debt or your income. Remember that the collector is simply trying to collect as much of the debt as is realistically possible before the statute of limitations expires.

How long does debt settlement stay on your credit report?

Generally, settled accounts stay on your credit report for seven years after the original date of delinquency. A debt settlement will negatively affect your credit, but not as much as failing to pay the debt will.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Trade Commission. "Debt Collection FAQs."

  2. "Settling” a Debt: The Pros and Cons."

  3. Consumer Financial Protection Bureau. "How to Tell the Difference Between a Legitimate Debt Collector and Scammers."

  4. Fair Debt Collection Practices Act. "§ 1692c. Communication in Connection With Debt Collection."

  5. Internal Revenue Service. "Canceled Debt – Is It Taxable or Not?"

  6. Experian. "How Long Do Settled Accounts Stay on a Credit Report?"

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