When your debts pile up, the idea of settling them for less than you owe can be incredibly appealing. Instead of paying every penny of the balance, enrolling in a debt settlement program lets you work with an expert to negotiate with your creditors for less, often reducing your balances by 30% to 50% or more.
This can provide serious relief from your high-rate debt problems and, for many people, is a way to escape the cycle of minimum payments and spiraling interest without resorting to bankruptcy. But while debt settlement can be a great solution for the right borrower, it isn’t the best fit for every situation.
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### What Types of Debts Typically Can’t Be Included in a Debt Settlement Plan?
Debt settlement works well for certain types of unsecured debts—like credit card balances or personal loans—but there are entire categories of debt that settlement companies can’t touch. If those excluded debts make up a big chunk of what you owe, you’ll likely need to consider alternative strategies.
Understanding these exclusions is essential before enrolling in a program. Otherwise, you may wind up with unresolved obligations or find yourself in a worse financial position than when you started.
Here’s what you need to know.
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### Debts That Do Not Qualify for Debt Settlement
The debts that typically can’t be settled fall into two main categories: those **backed by government authority** and those **secured by collateral**.
#### 1. Secured Debts (Mortgages, Auto Loans, etc.)
If a loan is backed by collateral—such as a house or car—settlement usually isn’t an option. Lenders have the right to repossess or foreclose on the collateral if you fall behind on payments, allowing them to recoup some or all of the balance by taking these actions.
Instead of negotiating a lump-sum payoff, secured lenders generally require you to catch up on payments, refinance, or face repossession or foreclosure. For example:
– If you stop making your car loan payments, the lender can repossess and sell the vehicle.
– Falling behind on mortgage payments puts you at risk of foreclosure.
Debt settlement companies generally cannot intervene in these situations.
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#### 2. Student Loans
– **Federal student loans** are generally not eligible for traditional debt settlement programs. Though unsecured, these loans are backed by the government, which offers its own repayment plans, deferment options, and forgiveness programs. Federal law makes it very difficult to settle these debts for less than what’s owed.
– **Private student loans** can sometimes be negotiated. However, many lenders are reluctant to settle, and even when they do, the negotiation process tends to be more complex than with credit card debt. Plus, not all debt settlement or debt relief companies handle private student loan negotiations, so it’s not a reliable strategy.
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#### 3. Tax Debts
Back taxes owed to the IRS or state tax agencies typically fall outside the scope of debt settlement. These agencies have strong collection powers, including wage garnishment and refund seizures, and debt relief companies usually lack the authority to negotiate on your behalf.
However, there are separate options for settling tax debt. For instance, the IRS offers an **Offer in Compromise** program, which allows qualifying taxpayers to settle their tax debts for less than the full amount owed. This process is completely separate from consumer debt settlement and requires a different application.
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#### 4. Child Support and Alimony
Domestic support obligations—such as child support and alimony—are legally mandated and cannot be negotiated down through settlement programs. Courts enforce these payments strictly, and falling behind can result in wage garnishment, legal action, or even jail time.
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#### 5. Court Fines, Legal Judgments, and Criminal Restitution
Debts related to legal penalties—including traffic fines, restitution orders, and lawsuit judgments—are also typically excluded from settlement. These obligations are court-enforced, and failure to pay them can carry serious legal consequences.
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### Is Bankruptcy a Better Option for Excluded Debts?
If most of your financial burden consists of debts that cannot be settled, debt settlement may offer little relief. In some cases, bankruptcy can be a more comprehensive way to resolve your obligations, depending on the types of debt you have.
Here’s an overview of the two most common bankruptcy options:
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#### Chapter 7 Bankruptcy
Also known as liquidation bankruptcy, Chapter 7 can eliminate many unsecured debts quickly—often within a few months. However, it generally does **not** discharge student loans, tax debts, child support, or secured loans (unless you surrender the collateral).
Chapter 7 does offer an **automatic stay**, which temporarily halts most collection actions and provides immediate protection while your case is processed.
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#### Chapter 13 Bankruptcy
Chapter 13 involves setting up a court-approved repayment plan over three to five years. While it doesn’t erase excluded debts, it can help you catch up on secured debts, like mortgages or auto loans, without losing your property.
It can also assist in managing tax debts and some legal obligations under court supervision.
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### Other Options for Excluded Debts
For certain excluded debts, specialized solutions exist:
– **Student Loans:** Income-driven repayment plans or federal forgiveness programs may offer repayment relief.
– **Tax Debts:** IRS programs such as the Offer in Compromise or installment agreements can help reduce or restructure what you owe. You can also consider working with a tax relief service.
– **Child Support and Alimony:** Legal avenues might be the only option if you’re struggling to meet these obligations. Consulting with a family law attorney can help explore potential solutions.
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### The Bottom Line
Debt settlement can be a powerful tool for tackling certain types of unsecured debt—especially high-rate credit cards and personal loans. However, it’s not a solution for every debt type or every situation.
Secured debts, student loans, tax obligations, legal fines, and domestic support payments typically can’t be settled through debt settlement programs. Knowing which debts qualify and which don’t can help you choose the best strategy for debt relief and avoid surprises down the road.
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**Find out what debt relief solutions are available to you today and take control of your financial future.**
https://www.cbsnews.com/news/what-types-of-debts-do-not-qualify-for-debt-settlement/