What is debt settlement?

Debt settlement is a solution for individuals who want to manage multiple types of debt with a single monthly payment. A debt settlement company (sometimes called a debt relief company) will negotiate your debts to help you get better monthly payments and interest rates. They may even be able to negotiate down some of your current debt balances. Then, you’ll pay your debt relief company a single payment that will go toward all your debts.

Debt relief providers will typically charge a fee for services. Avoid predatory companies that make lofty promises, and instead work with legitimate agencies who aren’t a scam.

Don’t let debt overwhelm you

Living with debt can be very stressful. There are services that can help you manage and consolidate your debt. Once you know your credit score and have a comprehensive overview of your debt, you’re ready to start tackling your debt.

While becoming debt-free is probably your main goal, it may be best to start smaller, depending on your situation. Focus on making consistent payments and following your plan. Debt relief experts — whether they’re certified credit counselors or debt settlement companies — can help you get started.

Benefits of debt settlement

  • A single monthly payment
  • Negotiate your existing debt
  • Potential reduction in interest rates
  • A unique program designed just for you

Downsides of debt settlement

  • May not resolve all of your debt
  • If you miss payments during debt settlement, your credit score will take a hit
  • Settling for less than you owe will also negatively impact your credit score
  • Debt relief companies often charge expensive fees

Additional options for debt relief

If you’re struggling with debt, you have options beyond debt settlement. Consider the pros and cons of each of your debt relief options before deciding on the best course of action for you and your financial situation.

  Credit counseling

Certified credit counselors (also known as debt counselors) often work for nonprofit organizations and can help you with debt management, budgeting and other money management skills. They can also help organize debt management plans to pay down your debts: in most cases, you’d make regular payment plans to the credit counseling organization and it would pay your creditors for you. Unlike debt settlement programs, they don’t negotiate the amount of debt but may help change your repayment terms.

To find a reputable, accredited credit counselor, you can begin your search with the National Foundation for Credit Counseling (NFCC).

  Debt consolidation loans

It may seem counterintuitive, but taking out an additional loan to consolidate your debt into a single payment may help you lower your overall debt burden, depending on the terms you can get from lenders. For example, if you have high-interest credit card debt but still have a good credit score, taking out a personal loan for debt consolidation can allow you to pay off the credit cards and make a single monthly loan payment, hopefully with a lower APR. Use our debt consolidation calculator to see your personalized results.


As a last resort option, bankruptcy can help discharge your debt — but it severely affects your credit score and creditors may still be able to seize some of your assets.

Chapter 7 bankruptcy involves liquidation of nonexempt assets, even though you’ll discharge unsecured debt; Chapter 13 bankruptcy helps create a payment plan (so you’ll still have to pay off some debts) but may help protect you from foreclosure, in some cases. Be sure to consult with a bankruptcy attorney to see if bankruptcy is the best course of action for you.

What to know before you apply for debt relief

Watch out for debt relief scams

Debt relief programs can potentially help you get out of debt more easily, but there are plenty of scams out there. Watch out for companies that make specific guarantees: the Consumer Financial Protection Bureau (CFPB) says to avoid companies that guarantee that your debt will go away or that you’ll be able to pay pennies on the dollar. Make sure that you’re not paying any fees before your debt is settled, too.

It’s a good idea to check if there are any consumer complaints against the debt settlement company you’re considering — your state attorney general or local consumer protection agency can help you find out if there are any on file. Some states regulate debt settlement companies and require licensing, as well.

In general, it’s wise to avoid any debt settlement companies that:

  • Charges upfront fees, due before your debt is settled
  • Guarantees to wipe out your debt or names a certain percentage of debt reduction
  • Tells you to stop communicating with your creditors
  • Promises to stop all calls from debt collectors or halt lawsuits

Beyond that, it’s a good idea to get a second opinion before committing to a debt relief program. In some cases, you may be able to negotiate your debts and create a debt management plan yourself, which can save you money on fees the debt settlement company may charge. Many credit counselors offer a free consultation to give you some advice about your debt.

Debt relief can be limited

Debt relief companies will manage your relationship with your creditors in order to negotiate your debt and reduce the amount of money you owe. Essentially, you agree to stop paying your creditors and instead, deposit money into an escrow account managed by the debt relief company each month. There is often a fee for using this escrow account.

As you continue to miss payments, your creditors will continue to lose money and may be willing to settle for less than what you owe. But not all creditors will work with debt settlement companies, the Federal Trade Commission (FTC) and the CFPB warn. Missing payments will also have a negative impact on your credit score.

Debt relief companies cannot help with debts that are secured with collateral, such as auto loans or home mortgages. They also cannot help with federal student loans or state and federal taxes.

How debt relief affects your credit

Debt settlement may negatively affect your credit, especially if the company suggests that you don’t repay debts while the negotiation process is ongoing. If you miss too many payments, your debt could be sent to collections, which would also hurt your credit score.

Plus, if you’re not making payments on high-interest debt, it will grow quickly — even during the debt settlement process. In fact, by the time you factor in late payment fees and debt settlement fees, you may end the process deeper in debt than when you started.

The CFPB warns against working with companies that tell you to stop communicating with your creditors. Debt settlement companies focus on reducing your debt and not repairing your credit, so be aware that your future access to credit products may be affected if you pursue debt settlement.

Frequently asked questions

Debt settlement programs help set up debt repayment plans and may negotiate with creditors on your behalf. Once you’ve settled on a plan, you’ll have to make regular payments to the debt settlement company to pay off your remaining debt.

Debt relief programs don’t automatically eliminate your debt, but instead set up a more manageable repayment schedule, in many cases. Your entire debt won’t be forgiven and you’ll still have to make payments, but you may be able to reduce your overall debt burden.

Debt relief services aren’t free, and you’ll have to pay a fee that’s often calculated as a percentage of the debt burden you’re paying off. Credit counseling services, which are similar, often come at a cost as well.