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Debt settlement offers a way out of debt without paying in full. You can negotiate with your creditors to agree on an amount to pay. Once you’ve settled a debt, the remaining balance is forgiven.

You might consider settling debts if you’ve fallen behind on credit card bills or other unsecured debts. We’ll walk you through how debt settlement works and the main pros and cons to know.

Understanding what debt settlement is

Debt settlement is a process that involves negotiating with creditors to pay less than what’s owed. It’s a completely legal way to get out of debt without needing to pay the entire balance in full.¹

What is debt settlement designed to do for you? It offers some financial relief if you’ve been struggling to keep up with debt payments. Debt settlement – also called debt negotiation, debt repair, or debt resolution – is designed to be an alternative to filing for bankruptcy.

Debt settlement is not the same as debt consolidation or debt management. With debt consolidation, you take out a loan to pay off multiple debts, leaving you with just the loan balance to repay. A debt management plan involves making one payment to a debt management company each month, which then uses the money to pay your creditors on your behalf.¹

How does debt settlement work?

Debt settlement works by allowing you to reach an agreement with your creditors about how much of your outstanding debt balance you’ll pay. The remaining balance is then forgiven. For example, if you owe $10,000 to a credit card issuer, you might negotiate that down to $7,500 and have the remaining $2,500 canceled.¹

There are two ways to approach debt settlement. You can do it yourself or hire a debt settlement company. Here’s a brief look at how each option works.

  • DIY debt settlement. You contact your creditors and explain your interest in settling your debts. You make an offer, and the creditor might make one or more counteroffers before you reach an agreement. If you both agree, you pay the amount to the creditor in a lump sum or several installments.
  • Debt settlement company. You pay a set amount of money to the debt settlement company each month, which goes into an interest-bearing account. The debt settlement company negotiates with creditors to reach an agreement and once they do, they pull funds from your account to cover the settlement amount.²

Hiring a debt settlement company may be preferable to DIY debt settlement if you’re not comfortable negotiating with creditors. However, remember that debt settlement companies can charge fees for their services.

Debt settlement companies can base fees as a percentage of the total debt negotiated or forgiven. They may also charge flat monthly fees for their services.¹

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Pros and cons of debt settlement

Debt settlement can offer a way out of debt, but it’s not right for everyone. Here’s how the pros and cons compare.


  • Settling debts could save you money if you can pay significantly less than what you owe.
  • Negotiating with creditors could help stop collection calls if your creditors see you’re making an effort to pay.
  • Debt settlement companies can do the heavy lifting for you, so you don’t have to try and negotiate with creditors on your own.
  • Settling debts may be preferable to filing bankruptcy.


  • Creditors are not obligated to negotiate with you, and your settlement offer may be rejected.
  • Your credit score may take a hit, as creditors are typically unwilling to negotiate unless you’re behind on payments.
  • Working with a debt settlement company usually means paying one or more fees.
  • Forgiven debts may be considered taxable income by the IRS.³

Debt settlement alternatives

Consider alternatives to debt settlement before you decide how to manage your debt best.

Here are a few possibilities you might consider.

  • Credit counseling. A credit counselor can look at your debts and budget to offer possible solutions. For example, a credit counselor might suggest a debt management plan if you simply need help streamlining your monthly payments.¹
  • Debt consolidation. Consolidating debts can leave you with fewer payments to make each month. You may also be able to save on interest charges if you qualify for a low-rate personal loan. This could be less damaging to your credit than having debts settled, as a loan could help you improve your score when you make on-time payments.1
  • Balance transfer. Balance transfers allow you to move balances from one credit card to another. Shifting balances to a card with an introductory 0% APR can save on interest and potentially help you get out of debt faster since your entire payment goes to the principal.⁴
  • Bankruptcy. Bankruptcy may seem like an extreme option, but it’s sometimes the best way to manage debts. For instance, you might consider bankruptcy if you have loans, medical bills you can’t pay, and credit card debt. Chapter 7 bankruptcy allows you to wipe the slate clean on debt, while Chapter 13 allows you to pay it off over three or five years.⁵

If you’re looking at debt settlement alternatives, remember that each may have pros and cons. Balance transfers, for example, typically require a fee. If you don’t pay the balance off before the promotional rate period ends, you can still owe interest on what’s left.⁴

Recognizing scams in debt settlement

Debt settlement companies can help you get out of debt, but not all of them are legitimate. The Federal Trade Commission (FTC) routinely warns consumers to be aware of debt relief and credit repair scams.⁶

Here are some tips to avoid being scammed if you’re looking for debt settlement help:

  • Be wary of upfront payment requests. One tactic scammers use is asking for payment before services are rendered. This is illegal, so if a debt settlement company is asking for money before they’ve done anything for you, that’s a red flag.
  • Protect your information. If someone reaches out to you about helping you with your debt but you don’t recall contacting them, be cautious about sharing personal or financial details. They could be using a phishing scam to try to gain access to your information.
  • Read the fine print. If a debt settlement company asks you to sign a contract, read it carefully. Ask questions if there’s something you don’t understand. And beware of any company that refuses to answer questions or attempts to bully you into signing an agreement you don’t understand.
  • Trust your gut. Debt settlement scammers might make big promises to you about erasing your debt or heading off creditor lawsuits. If something sounds too good to be true or feels off, you may want to look for a different company to work with.

Debt settlement is just one option for getting out of debt

Debt settlement can give you some financial breathing room if you’ve been unable to keep up with payments. But it’s not the only way to handle debt. Looking at the pros and cons of all the options can help you find the right path for clearing your debt.

Learn how to use a credit card payoff calculator to pay down balances faster.

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¹ Information from the Federal Trade Commission's How to Get Out of Debt as of April 4, 2024:

² Information from the Consumer Financial Protection Bureau's What is a debt relief program and how do I know if I should use one? as of April 4, 2024:

³ Information from the Internal Revenue Service's Topic no. 431, Canceled debt – Is it taxable or not? as of April 4, 2024:

⁴ Information from the Consumer Financial Protection Bureau's Credit card key terms as of April 4, 2024:

⁵ Information from the United States Court's Bankruptcy Basics as of April 4, 2024:

⁶ Information from the Federal Trade Commission's Carrying credit card debt? How to avoid debt relief scams as of April 4, 2024:

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