Debt Settlement Limitations: 4 Debts It Won't Solve

Negotiating a debt settlement with your creditors can help you reduce your debt load and offers you significant stress relief. Not all debts, however, can be paid off through debt settlement. In these cases, you must pay off the full amount you owe, including any additional fees levied on the account.

Federal Student Loans

When you accept a federal student loan, you must repay the full amount you borrowed, plus fees. Debt settlement simply isn’t an option. The U.S. government doesn’t need to agree to a debt settlement with debtors due to its substantial collection ability. The government can garnish your wages, place a property lien on your home and seize funds in your bank accounts to recover your student loan debt. Unlike other creditors, the government also has the right to garnish exempt funds, such as Social Security payments and tax returns.

Mortgage Debt

If you fall behind on your mortgage payments, you owe a debt to your lender consisting of each late payment and any additional fees your lender charges. Your inability to repay the debt in full won’t convince your mortgage lender to offer you a debt settlement--it will convince your mortgage lender to initiate foreclosure proceedings against you. You must repay your mortgage debt in full to prevent a foreclosure.

Don’t confuse mortgage debt with mortgage deficiency debt, which is the amount you may owe after a foreclosure. Mortgage deficiency debt occurs when your loan balance is higher than the value of your home and can often be successfully settled.

Post-Judgment Debts

If a creditor or lender sues you over an old debt and obtains a court judgment against you, this often gives the creditor the right to garnish your wages. Some states permit garnishment only by the federal government, but if you live in a state that allows garnishment by private creditors following a judgment, a debt settlement is likely a lost cause.

Although settling debts prior to going to court is common, once your creditor possesses a garnishment order against you, it is guaranteed to collect the full amount you owe as long as you remain with your current employer. This gives the creditor little motivation to accept a settlement agreement from you. It’s in the creditor’s best financial interest to continue garnishing your wages and collect the full amount rather than allow you to pay less.

Child Support

Although you may be successful negotiating a settlement for any back child support you owe, you can’t attempt to settle your regular monthly child support payments. Your obligation to pay child support is ongoing. You have the option to return to court and seek lower child support payments, but without a court order reducing your payment obligation, you cannot settle child support debt.

Don’t be fooled into thinking that a statement from the custodial parent giving you permission to settle your child support debt makes paying less than you owe legal. It doesn’t. You still legally owe the amount that the court originally ordered unless the court decides otherwise.