A Guide to Debt Settlement

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Being in debt isn't uncommon. In, fact, the average American under the age of 35 has $101,970 in debt as of 2019 (including mortgage debt).

If you're in debt and currently behind on your debt payments, then debt settlement may be for you. It's an alternative to bankruptcy and will let you get rid of a lot of debt with less money than you owe. You can negotiate debt settlement yourself or you can use a company to do it for you.

Learn more about debt settlement and if it's the right choice for you.

How Debt Settlement Works

Basically, when you settle debt with a company, you offer to pay less than you owe in exchange for the rest of the debt to be forgiven. Sometimes you can negotiate down to 30% of the original amount that you owed.

Debt settlement only works on unsecured loans or debts without collateral such as credit cards or personal loans. For loans with collateral such as your car or home loan, the bank will repossess the item and will not negotiate a different payment.


Keep in mind, you must pay the amount you negotiated in one lump sum within a few days of making the agreement with the company.

For this reason, you should negotiate with just one company at a time. Debt settlement does affect your credit score negatively because you're essentially withholding payments from your creditors, but it is better than having a lot of outstanding or overdue debt on your credit report. It may be a better option than bankruptcy.

Pros of Debt Settlement
  • Can help clear up your debt quicker than paying it off

  • Negotiation makes it possible to take care of your debt

  • Allows you to pay something towards your debt

Cons of Debt Settlement
  • Negative effect on your credit score

  • Can only address one debt a time

Pros of Debt Settlement

Debt settlement can help clear up your debt much more quickly than paying it off. Even with the best debt payoff plan, it will likely take you years to pay off a substantial amount of debt, which will only push your other financial goals back, as well.

Debt settlement negotiation may make it possible to take care of your debt rather than ignoring it and hoping that it will go away. Debt settlement also allows you to pay something towards your debt, which can also be helpful when managing your budget.

Cons of Debt Settlement

Debt settlement does have a negative effect on your credit score since the debts will not say paid in full. You can only address one debt at a time, which means you may still be fielding collection calls while you try to save up money to pay off your debt settlement.

It may take time to pay off all of your debts, whereas bankruptcy would take care of paying them off more quickly. Also, keep in mind that you will need to pay taxes on the amount of debt that has been forgiven as part of your debt settlement. That's why it's a good idea to plan for how debt settlement will affect your taxes.

Negotiating Debt Settlement Yourself

While you may work with a debt relief agency or a credit counselor to settle your debt, you can also negotiate a debt settlement on your own.

To do this, you'll need to get organized. You will need to list the debts you are currently behind on in payments and look at the amount you currently owe. Try to save roughly 50% of that amount and then call the lender to offer an amount as settlement in full.

Leave room for negotiating, too. So it's smart to offer your lender a smaller amount than you currently have. If they will accept the amount as payment in full, you need to request that they send you a letter stating that your debt will be forgiven if you pay that amount. Wait until you receive it before sending the payment.

Also, keep a copy of both the letter and your debt settlement check on file. This will protect you in the event that the company argues that you still owe them money. Then, once you have settled one debt, you start the process over with another lender.

Using a Debt Settlement Company or Lawyer

You can use a debt relief company or a lawyer to settle your debts as well. A debt settlement company will contact your creditors for you and negotiate the settlements.

During this time you will be making monthly payments to the debt settlement company, which they will save to negotiate settlements for you.


The debt settlement companies will take a portion of that money for fees for their services.

But do your research beforehand. It is important to carefully research the company and make sure it is legitimate and has been open for several years before going with them. A debt settlement lawyer will work in a similar way as a debt settlement company.

Alternatives to Debt Settlement

There are debt management alternatives to debt settlement. One is to set up a debt payment plan yourself. Examples of this include the snowball method, in which you pay off your debts from smallest to highest balance. That way, once you pay off the smallest balance, you can put that money toward the next smallest amount, then the next amount, and so on. You can also pay off your debts from the highest to the lowest interest rate.

Credit counseling is another option. A credit counseling service will help you create a budget and will work with your creditors to reduce your monthly payments or interest rate. You will make monthly payments to them and they will pay your creditors. This is better than debt settlement, but it does affect your credit score. Finally, bankruptcy is another option. It will severely affect your credit score and make it difficult for you to borrow money in the future.

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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. Board of Governors of the Federal Reserve System. "Survey of Consumer Finances (SCF)."

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