Is Debt Settlement Really a Thing?

There are times in life when seeking professional help is the wisest move you can make. One of those times may be when your credit card or other unsecured debts are out of control and you can’t turn the situation around.

You may have heard about a process called debt settlement, in which creditors allow you to pay less than what you owe to satisfy your obligations. But is debt settlement really a thing? It is, and like so many other aspects of life, there are some pros and cons of debt settlement.

What is Debt Settlement?

While you can handle the process on your own, it can be easier and less time consuming to let a professional at a debt settlement company take charge. These experienced negotiators will work to get your creditors to agree to accept a one-time payment in full of less than your outstanding balance, in exchange for the debt being marked as “settled.” 

How Does Settlement Work?

A consultation with the company with which you’re interested will help you determine whether you’re eligible for debt settlement. Generally, you must have a set amount of debt, with some firms requiring $15,000.  

Once you’re enrolled, you’ll cease paying your creditors and put the money into an escrow-type account that will be used in negotiations, once you’ve saved enough. When a prospective settlement is reached, you’ll be asked to approve it. Then, funds from your account will be disbursed to complete the transaction. 

While debt settlement companies do charge for their services, they are not legally allowed to seek payment until they’ve settled as least one of your accounts. According to the American Fair Credit Council, debt settlement enrollees wind up paying about half their actual balance on average. 

Pros and Cons of Debt Settlement

Every debt solution has its benefits and drawbacks. Here are debt relief program pros and cons.


  • Relief from overwhelming debt. And you get to pay less than the amount owed, to boot.
  • You’ll repay your debt faster than you could on your own. Most debt settlement programs last between two and four years – much less than the time it would take you to eliminate your debt with minimum payments. That could take decades.
  • Avoid bankruptcy. A bankruptcy filing stays on your credit report for seven to 10 years and you could lose assets. Some employment applications even ask whether you’ve filed bankruptcy.
  • No collections activity. Once a settlement agreement is reached, all collection agency activity will stop. 
  • You avoid a lawsuit. Debt settlement will likely help you skirt a lawsuit over your debt. There’s a good chance your creditors will settle your debt rather than pay a lawyer to go after you.


  • Fees. Debt settlement companies charge a fee that usually ranges between 15% and 25% of the debt amount being settled. 
  • Credit hit. The process of debt relief will cause your credit scores to drop, but not as much as bankruptcy would. However, at this point, your credit is probably already damaged. Remember, too, that once your accounts are settled, you can begin rebuilding your credit profile.
  • Funds held. The provider will hold onto your savings while negotiations take place, which might be a few years. In other words, the process requires discipline and patience.
  • Tax issues. You might owe taxes on the reduced amount since creditors must report debt reductions of $600 or more to the IRS.
  • Creditors could say no. There is no guarantee the creditor will deal with a debt settlement company.

So, yes, debt settlement is very much “a thing.” But it isn’t for everyone. To decide whether the strategy is right for you, go over your finances, do your homework proceed accordingly.