Debt settlement is a debt-relief program that seeks to eliminate your credit card debt. Unlike debt consolidation, debt settlement negotiates with creditors to reduce the total balance of your debt, not just an interest rate decrease. This is how the process works.

The first step of debt settlement is to stop paying your credit card balances. You may be a little uneasy about stopping payments but you need to weigh your options. If you already have bad credit and have multiple late payments, ceasing your payments can benefit you by giving you some leverage with the lender. The lender wants their money back and if you stop payment, they may be more likely to agree upon a settlement amount. The alternative for them is legal action, but the time and money involved is often times not worth the trouble for the lender.

If you have good credit, stopping payments will hurt your credit score. You must consider the benefit of gaining leverage to settle your debt at 30 to 70 percent of the original balance with the result of damaging your credit score. One question is to ask yourself if it is wise to borrow more money when you already have massive debts. If it is unwise to accumulate more debt, then how much does your credit rating matter? Plus, once you've settled your debt, your debt-to-income ratio increases in your favor.

The next step is the negotiation process. Unfortunately, banks and lenders usually don't work with individuals. To them, you are one account and you don't have much sway. But, if you work with a debt settlement company, their professionals can go to a bank or lender with a bulk amount of debt which the bank or lender might then be willing to negotiate. Some debt settlement companies can reduce your debt by 70 percent. However, debt settlement companies aren't perfect and they charge for their services.

The third step is agreeing to a settlement amount and then paying that amount in full. Most settlement agreement hinge on the fact that the debtor, you, pay a percentage of the original debt in one lump sum. If you owed $10,000 and the creditor agreed to settle for $5,000, you would need to pay that amount in full. Debt settlement companies will ask you to deposit a certain amount each month into an account so that you will have funds to make a settlement proposal. If both sides agree and the debt is paid, you receive a paid-in-full statement and the debt is satisfied.

Debt settlement has its benefits but also its downsides. Some argue that the debt settlement companies don't do anything you can't do yourself, which is somewhat true. However, the percentage a debt settlement company can reduce your debt may be worth the cost of their fees. There is no silver bullet for debt, but there are certain methods that work better depending on your circumstances.