Apr 21, 2026
At 21 years old, Andrew has $70,000 in debt and just received a $250,000 settlement check after being shot by a teenager with a 3-D printed gun—a story Dave Ramsey called "the wildest thing I've ever heard." (1) Putting aside the oddness of the source of Andrew's windfall, he wanted advice on how to use the cash. As for the debt, Andrew said:
"I want to play the waiting game. I just want to let it fall off on its own." He was betting on the statute of limitations to eventually wipe his slate clean. But Ramsey and co-host Dr. John Deloney weren't having it.
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"Fall off? No, honey, you owe the money. " Ramsey told him. Deloney and Ramsey insisted that Andrew pay what he owes because integrity matters. However, they did offer one potential solution: ask if the creditor will accept a lower amount.
"You call them up and say, 'I need to settle this debt. What will you accept?'" Ramsey told him. "Whatever they tell you, write them a check for that."
It almost sounds too easy, but debt settlement is a legitimate and often overlooked tool for people with overwhelming amounts of debt. Here's what you need to know before you pick up the phone.
How does debt settlement work?
Debt settlement is a process where you work with your creditors to pay off a debt, often at a reduced lump sum. It tends to work best with unsecured debt, like credit cards, personal loans and medical bills. Because these lenders have no collateral (like a home or car) to fall back on, it gives you a bit of negotiating power.
But, there are a few caveats. First, not all debt is created equal. With secured debt, like a mortgage or car loan, lenders can repossess the asset, so they're less likely to cut you a deal. In Andrew's situation, he sold his car, so the lender was unlikely to reclaim it.
Federal debt, think student loans or back taxes, is generally not negotiable in the traditional sense. However, you might be eligible for payment plans or forgiveness, depending on your situation. For student loans, programs like Public Service Loan Forgiveness (PSLF) (2) or Teacher Loan Forgiveness (3) might help.
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It's also worth noting that debt forgiveness is counted as taxable income, so having a big loan forgiven might land you with a large bill come tax time.
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How to use debt settlement to clear up your finances
Ramsey explains to Andrew exactly what to do: call your lender, acknowledge the debt and ask them directly whether they'll accept a lower amount to clear it. For example, you might say, "According to my records, I owe $10,000 on this closed credit card account. I know I've fallen behind, but I do have some money available now. Would you accept $5,000 to settle this today?"
If there's a reason you've fallen behind, feel free to add some detail, but don't go overboard. You're looking to explain, not excuse your debt. So, if it's due to medical issues, you might say, "After suffering a broken leg, I was out of work for three months. It's really important for me to settle this debt the right way. Would you accept $5,000?"
Here are a few things to keep in mind:
Start lower than you're willing to pay
The creditor wants to get as much of their money back as possible, so it's in their best interest to get you to pay as much as possible. If you just got a windfall, don't mention it. Instead, start about 25% lower than you can afford to pay.
Ask for a debt validation letter
Before acknowledging the debt, ask for a debt validation notice; it should include your name, the creditor's name, an account number, an itemized list of the debt, including interest, and the current amount. While they do not have to provide the original contract (4), federal rules require debt collectors to substantiate the debt (5). If they cannot, you generally can't be held liable for the debt. (Note: This is not common, but it's worth exploring.)
Make sure you're talking to the right lender
If your bank or credit card has already sold your loan to a collections agency, you'll need to negotiate with them, not the original lender. The process is the same, but collections agencies often buy debt for pennies on the dollar — meaning there's potentially more room to negotiate.
Get everything in writing
A verbal agreement means nothing. Ask for a written settlement offer that confirms the amount, the account it applies to, and that the remaining balance will be considered satisfied.
Debt settlement can be a helpful financial tool if you're unable to pay off debts, but it comes with drawbacks. You'll owe taxes on the difference between your debt and what you paid, and your credit score will take a hit. Still, in some situations, it's worth it to get a clean slate — just make sure you understand the long-term impacts.
Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
YouTube (1); Federal Student Aid (2),(3); Aktos (4); Consumer Financial Protection Bureau (5)
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Danielle is a personal finance writer based in Ohio. Her work has appeared in numerous publications including Motley Fool and Business Insider. She believes financial literacy key to helping people build a life they love.
