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When a debtor is in a bad enough financial situation that a creditor becomes concerned about the client claiming bankruptcy, both individuals may choose to reach an agreement to pay off the debt at a reduced amount.
This is known as debt settlement, because the creditor is settling for a lesser amount than what is actually owed. This is also known as debt negotiation, through the negotiations are actually just the process of reaching the settlement.
Both the debtor and creditor have their reasons for settling the debt at a lower price:
The party in debt is trying to fix their financial situation without being required to declare bankruptcy. If they are unable to utilize a debt consolidation or credit counselling organization to repay what's owed, debt settlement is not as damning to their long-term credit as declaring bankruptcy; and because the debt is satisfied, it stops harrassment for payment from the lender and the other headaches that come from having bills that are well overdue.
For the creditor, debt settlement means they'll have to take less than the full amount, but they'll still receive more than they would were the debtor to declare bankruptcy. Accepting a settlement proposal also saves the lender money over utilizing collection agencies and/or barristers trying to gather the full amount. In addition, it means they'll get payment much quicker.
Many debt management businesses will use a combination of debt settlement and consolidation efforts, reducing individual debts before consolidating them into one debt at a lower interest rate.