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Sometimes, debt can spiral out of control. Whether you’re facing an ever-growing balance and interest charges that you just can’t manage or dealing with an unexpected financial hardship (e.g., job loss, illness), you might find yourself unable to make payments. 

Rather than trying to barely keep your head above water, debt settlement could be one option to consider. 

What is debt settlement?

Debt settlement is a type of debt relief in which a borrower and lender come to an agreement that involves paying off the balance for a reduced amount. This negotiated amount is typically 50% to 80% of your total balance and paid in one lump sum. 

This can be a viable option for borrowers who are unable to make minimum monthly payments or are facing financial hardship. 

How does debt settlement work?

If you decide to use a debt settlement company, they’ll likely ask you to stop making payments during negotiations. Typically, they’ll have you put money in an account (like your monthly payments you’re no longer making) that’s managed by a third party. Once the account reaches a specified amount, the debt settlement company will negotiate down the amount you owe. Then, they will use the funds to pay back your creditors until the new, lower balance is paid in full.

Avoid debt settlement scams! Legitimate debt settlement companies will never ask for payment upfront, promise all your debt will be forgiven or claim your credit won’t be affected. Do your research before deciding on a settlement company by reading reviews on Trustpilot and the Better Business Bureau (BBB), and consider consulting a financial advisor.

Strategies for settling debt yourself

Before deciding to work with a debt settlement company, you could try to negotiate on your own — or at least find ways to save money on the amount owed. Here are a few tips to get started:

  • Reach out to your lender. Start by contacting your lender and requesting a goodwill waiver of things like late fees, penalty interest or late payments reported to the credit bureaus. If you have an extenuating circumstance and explain such, they might be willing to help you out in some way. 
  • Ask about forbearance or deferment. Many lenders will also offer loan forbearance or deferment if you have a qualifying hardship, which can either pause your payments or temporarily make them interest-only so you can catch back up. A qualifying hardship can be anything from losing your job to having to cover sudden medical bills.
  • Consolidate your debt. Consolidating your debt with a new loan (e.g., credit card consolidation) can potentially help you secure a lower interest rate and pay off your debt with a personal loan. You’ll reduce your interest payments and can sometimes stretch out your repayment term, both of which could lower your minimum monthly payment.

Tip: Always speak to a financial advisor first to see if reaching out on your own makes sense or if you’re better off consulting with a debt settlement company immediately.

Risks to consider when settling debt

While debt settlement can save you money, it isn’t a decision you should make lightly. For one, while you could potentially cut down your debt, it’s not guaranteed. If your creditor refuses to settle, you could still remain on the hook for the entire amount owed.

It can also damage your credit. If a debt settlement company is negotiating your settlement, they’ll usually recommend that you stop making payments until negotiations are complete. This can be damaging to your credit score as those late payments will stick with you for seven years — even if you’re successful in settling the debt. 

Tip from the Consumer Financial Protection Bureau (CFPB): Before doing business with a debt settlement company, you can contact your and to check if there are any complaints against the company. 

Pros and cons of debt settlement


  • Owe less: You can pay off your debt faster since you’ll owe less than the full amount. This could also help you save more money in the long run on interest charges and possibly even fees.
  • Avoid bankruptcy: If you simply can’t stay on top of your total debt, settlement can help you avoid bankruptcy. Bankruptcy has long-term negative consequences and can stay on your credit report for up to 10 years, so it should typically be your last option.
  • Prevent wage garnishment: If you miss payments and become delinquent on any of your accounts, you could suffer or other legal collection actions. But debt settlement allows you to make a deal with your creditors so that they can at least get paid part of what’s owed. Lenders would prefer to get paid less than nothing at all. 


  • Impact on credit: Debt settlement can negatively impact your credit score, as the lender typically reports the settled debt to the credit bureaus as “settled for less than the full amount owed.”
  • Fees: Debt settlement companies typically charge fees for their services — usually 15% to 25% — which will add to your out-of-pocket expenses and can negate some of your savings.
  • Doesn’t cover all debt: Settlement isn’t always available for all types of debt. For example, student loans and federal and state taxes are not eligible.
  • Late fees and interest can still apply: You can still incur penalties (such as late fees and interest) while your debt is being negotiated. Depending on how long the process takes, you could significantly increase your total amount owed while you wait on a settlement agreement.

Alternatives to debt settlement

Debt settlement is a good option if you’ve already fallen behind on payments or defaulted entirely. But before deciding on debt settlement — or even bankruptcy — it’s a good idea to explore alternative options, such as:

Explore your options: Best debt consolidation loans

Frequently asked questions (FAQs)

Initially, debt settlement will negatively affect your credit and the account(s) settled will remain on your credit report for seven years. But if you keep up with payments toward the new amount you settled for, you can get back on track. 

To improve your credit after debt settlement, you should:

  1. Pay your bills on time.
  2. Pay down any outstanding balances.
  3. Avoid applying for new credit.
  4. Continue using credit responsibly.

Debt settlement is an option worth considering if you’re facing serious financial hardship or unable to make your monthly payments on multiple debts. It can potentially help you get a handle on your debt by cutting down the total amount owed. However, you should weigh your options and speak to a financial advisor or credit counselor before making a decision.

It’s better to settle your debt than not pay it all. Although debt settlement does have a negative impact on your credit initially, you’re still able to recover. But if you just stop paying your debt altogether, your account could become delinquent or you could default which are both much worse.

Once your debt is settled, that doesn’t mean the accounts are completely removed from your credit report. If you had missed payments before you decided to settle, the account(s) will stay on your report for seven years after your first delinquency. If you kept up with your payments before settlement, however, the account(s) stay on record seven years from the date of debt settlement.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Hanna Horvath


Hanna Horvath is a CERTIFIED FINANCIAL PLANNER™, copywriter, and journalist. As a content marketer and agency founder, Hanna partners with fintech brands across the industry to establish their content messaging and drive audience engagement. She also writes and edits articles on personal finance — her work has appeared in Policygenius, Business Insider, Lemonade, NBC News, Inc Magazine, and more. Hanna currently lives in Brooklyn, New York, and when she's not writing, she's training for a marathon, trying out a new recipe, or photographing the world around her.

Jamie Young


Jamie Young is Lead Editor of loans and mortgages at 91Ӱ Blueprint. She has been writing and editing professionally for 12 years. Previously, she worked for Forbes Advisor, Credible, LendingTree, Student Loan Hero, and GOBankingRates. Her work has also appeared on some of the best-known media outlets including Yahoo, Fox Business, Time, CBS News, AOL, MSN, and more. Jamie is passionate about finance, technology, and the Oxford comma. In her free time, she likes to game, play with her two crazy cats (Detective Snoop and his girl Friday), and try to keep up with her ever-growing plant collection.