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If you’re behind on your credit card payments and looking for a solution, you might be considering debt settlement, which promises to help clear your debts.
We encourage you to think carefully about debt settlement. It's a risky option that can take years and seriously damage your credit score. What's more, there’s no guarantee of success.
Learn how debt settlement works, if it ever makes sense to hire a debt settlement company and alternatives for getting out of debt.
How does debt settlement work?
Debt settlement is a process where you work out an agreement with your creditors to pay off your debts for less than you owe. Though you can settle debts yourself, many borrowers hire a for-profit debt settlement company, also referred to as a debt relief company.
Here’s how it works: A debt settlement company will ask you to stop making payments on your debts and instead funnel that money into an escrow account, which is a separate account set up by the settlement company.
As your debts become increasingly delinquent, the settlement company will approach your creditor with an offer, using the money in the escrow account. Ideally, the creditor accepts the offer, thinking that some money is better than none. Then, your debt is cleared for the lesser amount.
Debt settlement isn’t free. Debt settlement companies charge a fee of 15% to 25% of the amount you owe for each successful settlement. For example, if you owe $10,000 and the debt settlement company charges a fee of 25%, you’ll pay a $2,500 fee (in addition to the settled amount).
The average debt settlement client saves $1,440 per enrolled account after fees, or 31.9% of what they owed, according to a 2023 economic impact report commissioned by the Association for Consumer Debt Relief.
Why is debt settlement so risky?
The idea of eliminating your debt for less than you owe may sound enticing, but debt settlement is risky for several reasons.
Interest and fees keep accruing. While you’re paying into an escrow account in hopes that a creditor accepts your offer, you’ll continue to rack up interest and late fees. If today you owe $4,000, for example, you may owe $5,000 by the time you settle. As these charges pile up, you reduce any potential savings that debt settlement promises.
Success isn’t guaranteed. Though debt settlement may sound promising, it can be a “very bumpy road,” says Bryce McNitt, former chief of staff for market offices at the Consumer Financial Protection Bureau.
Settling your debt can take two to four years, and there’s no guarantee a company can settle your debt. Some creditors won’t accept a debt settlement offer or work with debt settlement companies.
Risk of credit score damage, charge-offs and lawsuits. When you stop making payments, creditors often ramp up collection efforts — which can have long-lasting financial ramifications even if you eventually settle your debt.
“You very well could be in collections at that point, and your credit score will dive down,” McNitt says. “You could also face pressure tactics from collectors. If you're getting calls, if you’re getting a lawsuit, that’s very stressful.”
Any debts you successfully settle may further hurt your credit score, since settled accounts stay on your credit report for up to seven years.
Forgiven debt may be taxable. If a creditor agrees to settle an account for less than you owe, you’ll likely owe taxes on the forgiven amount. The IRS treats cancelled debt as taxable income and typically requires creditors to file Form 1099-C to report forgiven balances that exceed $600.
Is debt settlement ever a good idea?
If you don’t have any plan to deal with your debt, and you’re falling further and further behind on payments, debt settlement may be a better option than doing nothing at all, since it at least offers a potential way forward.
Debt settlement companies also don’t have minimum credit score requirements, so settlement may be appealing if you have bad credit (a score in the high 500s or lower). But there are still better alternatives to consider first.
» MORE: Best debt settlement companies
Other ways to tackle overwhelming debt
Debt management plans
Financial experts widely recommend debt management plans, which are less risky and don’t require good credit. These plans are offered by nonprofit credit counseling agencies and roll multiple unsecured debts into one at a lower interest rate, which makes the debt easier to pay off.
Though debt management plans may temporarily lower your credit score, successfully paying down your debt can help your score, says Justin Botimer, partner development manager at GreenPath Financial Wellness, a nonprofit credit counseling agency. Debt management plans also have lower fees than debt settlement, but many people don’t know about them, he says.
“The reality is our industry doesn't have the big budgets that for-profit companies have,” Botimer says. “We hear all the time, ‘I wish I would have known about you sooner.’ This is after they’ve been wrangled into debt settlement.”
Debt consolidation loans
A debt consolidation loan is another alternative. You use the money from a loan to pay off your debts in one fell swoop, then pay back the new loan in fixed monthly installments, ideally at a lower interest rate.
You’ll typically need a strong credit score to qualify for a debt consolidation loan with a low rate. Some online lenders specifically offer debt consolidation loans for borrowers with bad credit, but this option only makes sense if the loan has a lower annual percentage rate than you’re paying on your existing debts.
DIY debt settlement
If there’s no way you can repay your credit card debts, you can try to settle them yourself.
Creditors are often willing to settle with borrowers directly, Botimer says, which saves you from paying a hefty fee to a debt settlement company and may preserve your relationship with the creditor.
If the creditor won’t settle, you can ask for other relief options, like a reduced interest rate or lower monthly payment.
Bankruptcy
Bankruptcy may be an option for people whose debt payments account for a significant portion of their income. Though it may temporarily hurt your credit, bankruptcy can protect you from aggressive action from creditors, like lawsuits or wage garnishment.
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- 1. Association for Consumer Debt Relief. 2023 Economic Impact of the Debt Resolution Industry. Accessed May 19, 2026.
