When you settle debt, you pay less than you owe after a period of stopping payments to your creditors saving up money for a lump-sum payment. In contrast, debt consolidation is when you combine multiple debts into one personal loan, allowing you to make a single monthly payment at a lower interest rate. You will generally need a credit score that is at least fair or good to qualify for a debt consolidation loan.
Best Debt Settlement Companies of 2023
Debt settlement is when a for-profit company negotiates with creditors to accept a lump sum for less than what you owe rather than the payment. The debt settlement company will usually instruct you to stop paying your creditors instead put that money in a savings account that will be used toward the lump-sum payments.
Depending on factors such as your number of creditors how much you can save each month, you might need one to four years to make worthwhile settlement offers. In the intervening time, you could end up further in the hole from late fees other penalties.
Also, keep in mind that some creditors may not agree to settlements, some creditors do not work with debt settlement companies.
Working with debt settlement companies can be risky. You will typically see your credit score damaged, you could be sued by your creditors you could owe taxes on debt you settle.
Here’s what you can expect once you enroll in a debt settlement program:
- You will stop paying your debts. Instead, you will set aside that money in a savings account for a settlement that will be offered to your creditors. Debt settlement programs often require you to save for at least 36 months to settle all of your debts, according to the Federal Trade Commission.
- You can expect to hear from creditors debt collectors. After you stop paying your accounts, you could get calls from creditors debt collectors. You also risk being sued by your creditors during this period. The debt settlement company may advise you on how to deal with calls.
- Your debt relief company will start to negotiate with creditors after about 90 to 180 days. That’s around when creditors begin to write off what you owe as bad debt. The debt settlement company will offer partial payments as an alternative to no payments if you file for bankruptcy.
- Your creditors may decide to accept settlement offers. You will need to have enough saved to cover lump-sum payments fees for the debt settlement company.
- Your account will be closed – if it is not already – once a settlement offer is accepted. This means you cannot regain use of the credit card.
Debt settlement may be a last resort if you:
- Have an unmanageable amount of debt.
- Do not want to file for bankruptcy.
- Are willing to risk your credit score.
Creditors might be willing to settle for less than the full amount you owe if the alternative is getting no money at all or taking legal action. If you just want to reduce your payments, then debt settlement is not for you.
“Debt settlement is an option for consumers who can’t afford their current debt payments either can’t or won’t file for bankruptcy,” says Gerri Detweiler, credit expert co-author of “Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.”
- You may reduce what you owe.
- You may avoid bankruptcy.
- You will get creditors you’ve settled with off your back.
- You may not be able to settle some debts. Results are not guaranteed, as some creditors do not negotiate with debt settlement companies.
- Stopping minimum monthly payments on debts will cause your credit score to plummet may lead to collection calls. You could face lawsuits from your creditors.
- Missed payments will accumulate late fees, penalties other charges that could make settlements less valuable.
- Your forgiven debt may be taxable.
- A settled account will remain on your credit report for seven years from the date of your first missed payment.
- You will have to pay a fee to the debt relief company when an account is settled.
Debt relief companies may charge a percentage of the debt enrolled in the settlement program or a percentage of the amount you save through each settlement.
The fee may range from 15% to 25% of the debt you enroll in the settlement program. This means if a debt relief company saves you $10,000 in a settlement or settles $10,000 in debt, you would pay the company up to $2,500.
If you have multiple debts a debt relief company settles one of them, the company can only charge you part of its fee for settling that debt, according to the FTC.
Note that you could pay additional fees if you are required to set up maintain a savings account with the debt settlement company.
When choosing a debt settlement company, focus on five key areas:
- Requirements. Make sure the company can settle the type the amount of debt you have. Many companies will only settle unsecured debts, such as credit cards or medical bills.
- Fees. Look for a debt settlement company that charges the lowest fee percentage.
- Accreditation. Verify that a company is accredited by the American Fair Credit Council, the International Association of Professional Debt Arbitrators or, ideally, both. These groups require members to meet certain standards designed to help consumers.
- Transparency. Debt settlement can’t protect you from debt collectors, lawsuits or hits to your credit score, a good debt relief company will be transparent about these facts. Check the company’s website for disclosures about the effects of settlement on your credit score.
- Customer service. Check the Better Business Bureau the Consumer Financial Protection Bureau’s Consumer Complaint Database for reviews complaints.
- Debt management plans. A DMP consolidates your debts into one monthly payment establishes a plan to pay them off in three to five years. A nonprofit credit counseling agency creates manages your plan, a counselor may be able to negotiate interest rates to reduce what you owe without a settlement. The agency will collect your payments may charge a small fee.
- Debt consolidation loans. A debt consolidation loan combines multiple debts from credit cards, loans other bills into a single monthly payment. The new loan ideally features a lower interest rate, a lower monthly payment or both.
- Balance transfer credit cards. A balance transfer allows you to move debt from one credit card to a new one. With good credit, you could qualify for a card with a 0% introductory annual percentage rate on balance transfers pay down debt without interest for up to nearly two years.
- Bankruptcy. This legal proceeding prevents creditors from harassing you for payments allows you to keep your home in many cases.
- Direct negotiation. You can negotiate with your creditors yourself if you don’t want to work with a debt settlement company. “There’s nothing a debt settlement company can do for you that you can’t do for yourself,” says credit expert John Ulzheimer, formerly of FICO Equifax. “If you’re having a hard time making your payments, then talk to your lender. They’d rather work with you than with a third-party settlement company.”
To recap, here are the picks:
Best Debt Settlement Companies of 2023
Any debt settlement agreement that requires you to stop making payments to creditors will damage your credit score. That is because payment history is the most important factor in your credit score. Credit utilization, the second-most-important factor, is affected when the debt settlement process involves closing accounts.
“Unfortunately, you can’t have it both ways: You can’t settle debts for less than what you owe avoid damage to your credit,” Detweiler says. You have to decide between protecting your credit getting out of debt, she says, getting out of debt can be the more important short-term goal.
“Settlements are considered to be major (derogatories) in both FICO VantageScore’s scoring systems,” says credit expert John Ulzheimer, formerly of FICO Equifax. “As such, they can certainly result in lower scores.”
But settling an account won’t hurt you as much not paying at all, according to Experian.
Yes, debt settlement companies are legitimate, but some can be deceptive or fail to deliver on their promises. The FTC recommends avoiding companies that:
- Charge fees before settling your debts, a practice prohibited by the agency.
- Say they can eliminate all of your unsecured debts.
- Advertise a “new government program” for personal credit card debt, which is a scam.
- Instruct you to stop communicating with your creditors but don’t tell you about the repercussions of doing so.
- Claim they can stop all debt collection calls lawsuits.
“Be very leery about debt settlement companies that make settlement seem like a sure thing or that charge high upfront fees,” Detweiler says. “There’s no guarantee that every one of your creditors will settle, a debt settlement company should be realistic about your prospects based on your individual creditors.”