The term debt settlement refers to the outcome of the debt negotiation process. Debt settlement, also known as debt arbitration, takes place between the debtor (borrower) and creditor (lender), when the debtor is unlikely to make payments in-full on the money owed.
Creditors are often willing to settle debt obligations if they believe that payment in-full may never occur. In this situation, even the receipt of partial payment of money is beneficial to the creditor. Debt settlements often take place to avoid individual bankruptcy proceedings. That is to say, a creditor would rather receive some of the money owed than risk the debtor declaring bankruptcy and not receiving any repayment of an outstanding balance on a loan.
The debtor stands the best chance of coming to a mutually beneficial debt settlement arrangement when the money is owed on unsecured debt such as credit cards. With secured debt, such as a home or auto loan, the creditor has the ability to foreclose on the home, or repossess the car. The car or home can then be sold and the proceeds used to repay some, or all, of the money owed.