The Biggest Benefits and Disadvantages of Debt Relief

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Debt settlement is a debt-repayment strategy where you negotiate with your creditors to accept a partial payment as full satisfaction for the debt. If the creditor agrees, you pay just a percentage of your outstanding balance, and the rest of the debt is canceled for good.

Reasons Why You May Benefit From Debt Settlement

Outside the debt settlement industry, debt settlement is rarely (if ever) recommended as a viable solution to dealing with your debts. Much of this has to do with the number of debt settlement scams and the mis-education of consumers to the effects of debt settlement. For certain consumers, there may be some benefits to debt settlement.

Avoid Bankruptcy

The biggest reason that people choose debt settlement is to avoid bankruptcy. Bankruptcy is a debt solution that will follow you for the rest of your life. The bankruptcy entry remains on your credit report for 10 years, but many loans, credit cards, and job applications ask whether you’ve ever filed bankruptcy. If you answer no, and the bank later finds out that you actually did file bankruptcy, you could be found guilty of fraud. In the case of employment, you could lose your job.

Settling debts with your creditors, when it’s done right, can help you avoid filing bankruptcy and dealing with the consequences of bankruptcy.

Debt settlement will only stay on your credit report for seven years. There’s no public record of you ever having settled your debts, so once the credit reporting time limit has run on your settled accounts, you won’t have to deal with the settlement anymore.

Get Relief From Overwhelming Debts

The goal of debt settlement isn’t to get over on your creditors by paying them only a portion of the debt you accumulated. So it's unwise to rack up a large amount of credit card debt with the expectation of settling it all.

If you’re legitimately having trouble paying back what you owe, debt settlement may help you. Once you've negotiated and paid your settlement, you're essentially debt-free in less time and at a lower cost than if you tried to pay off your debts on a typical repayment schedule.

Comparing debt settlement to bankruptcy, creditors may not get as much from you even if you filed Chapter 13 bankruptcy. They may not get anything at all if you file Chapter 7 bankruptcy. Creditors know this which is why they accept settlement offers from some consumers.

Repay Your Debts in Less Time

On a good debt settlement program, you will repay your debts in two to four years. This is much less time than you’d spend paying back your debts normally (probably not an option if you’re considering debt settlement). Even debt consolidation, Chapter 13 bankruptcy, and credit counseling have debt repayment periods from three to five years. It might take decades to pay off debt if you stuck to the original repayment schedule.

Drawbacks of Debt Settlement

Of course, there are negative consequences to debt settlement. Creditors aren’t guaranteed to agree to settlement offers, and you may receive a smaller discount than expected, or none at all. Furthermore, your credit will suffer in the meantime (if it hasn't already), and you may owe taxes on the amount of debt that’s canceled. As with any debt solution, you must weigh the benefits of debt settlement to the negative side effects. However, in all cases, when your debt reaches an unmanageable level, compounding interest makes it hard not to accept debt settlement if you qualify for it. 

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Code. "15 USC §1681c."

  2. U.S. Courts. "Chapter 7—Bankruptcy Basics."

  3. U.S. Courts. "Chapter 13—Bankruptcy Basics."

  4. Internal Revenue Service. "Topic No. 431 Canceled Debt—Is It Taxable or Not?"

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