Understanding Debt Settlement: a Detailed Overview

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"%3Cscript%20src%3D%22https%3A%2F%2Fwww.googletagmanager.com%2Fgtm.js%3Fid%3DGTM-MP6F46L%22%20data-consent%3D%22ANALYTICS%22%20data-track-load%3D%22gtm%22%3E%3C%2Fscript%3E" });</script> <script type="application/ld+json"> {"@context":"http://schema.org","@type":"Article","mainEntityOfPage":{"@type":"WebPage","@id":"https://www.businessinsider.com/personal-finance/credit-score/what-is-debt-settlement"},"editor":{"@type":"Person","name":"Libby Kane"},"author":[{"@type":"Person","name":"Jennifer Streaks","sameAs":"https://www.businessinsider.com/author/jennifer-streaks"},{"@type":"Person","name":"Alani Asis","sameAs":"https://www.businessinsider.com/author/alani-asis"}],"publisher":{"@context":"http://schema.org","@type":"Organization","name":"Business Insider","legalName":"Insider Inc.","foundingDate":"2007","url":"www.businessinsider.com","sameAs":["https://www.instagram.com/businessinsider","https://www.twitter.com/businessinsider","https://www.facebook.com/businessinsider","https://www.linkedin.com/company/businessinsider","https://www.youtube.com/@BusinessInsider"],"founder":{"@type":"Person","name":"Henry Blodget"},"logo":{"@type":"ImageObject","url":"https://www.businessinsider.com/public/assets/logos/structured-data.png"}},"headline":"Understanding Debt Settlement: A Detailed Overview","alternativeHeadline":"How debt settlement works: A comprehensive guide","image":{"@type":"ImageObject","url":"https://i.insider.com/624488bb2d38730018f4915f?width=1200&format=jpeg","width":1200,"height":900,"caption":"Joint bank account rules on death usually state that the the surviving owner has complete control of an account if the other owner dies."},"name":"How debt settlement works: A comprehensive guide","datePublished":"2024-07-18T20:53:38Z","dateModified":"2025-02-06T18:47:24Z","description":"Debt settlement is a financial strategy to reduce debt through negotiation. Learn how it works, and its benefits, risks, and key considerations.","keywords":"","articleBody":"Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate credit score services to help you make smart decisions with your money.Negotiating a debt settlement with your creditors can significantly reduce the amount you owe. Debt settlement is a legitimate debt relief option if you're swimming in debt. However, it isn't a decision to take lightly. Debt settlement is a process that takes time and effort. Settling your debt through a third-party service can come with a hefty fee, and you may have to pay taxes on the amount you saved. Additionally, this process can severely hurt your credit score.Debt settlement is a debt relief program in which you negotiate with a creditor to reduce your debt if you pay a lump sum payment on the spot. You can take the DIY approach by negotiating directly with your creditor or debt collector to settle your debt. However, you'll need to be patient and determined during the process, as the goal of a collections agent is to recoup as much of your debt as possible, says Natalia Brown, chief client operations officer at National Debt Relief. Alternatively, you can work with a debt relief company that will negotiate with your creditors on your behalf for a fee, usually as a percentage of the total enrolled debt. Going through a debt settlement plan will take significantly longer, generally around three to four years.Working with a debt settlement company may increase the odds your creditors will agree to a debt settlement. \"Debt settlement companies can leverage the power of their client base to help negotiate rates versus rates individuals acting on their own may receive,\" says Brown.Related: The best loans for fair credit »Under a plan offered by a debt settlement company, you stop paying your credit bills and deposit money into a savings account instead. Once you reach an amount the debt settlement company determines is adequate, they negotiate with your creditors for a lower debt amount. All that money you saved is then used to pay off the settled amount.You can settle most types of unsecured debt, like medical bills, credit card debt, personal loans, payday loans, business loans, and sometimes private student loans. You can't settle secured debt like mortgages or auto loans. You also can't settle federal student loans or tax debts. Note: Most debt settlement companies don't advertise an official minimum debt to qualify for a program, but they generally only handle debts over $10,000.The first step is the initial meeting and setting up a plan. You will have a meeting with the debt settlement counselor and go over all your debt and develop a plan for negotiating with your creditors, reducing the amounts, and paying off what is owed. The debt settlement company will then contact your creditors and start the negotiation process. Although the company has done this many times before, these agreements do not happen overnight. Understand that you're asking your creditors to agree to accept less than they are owed. Once a settlement amount is reached, you will pay that amount, either all at once or through an agreed-upon payment plan. By working with a debt settlement company, you have the potential to pay off your debt at a reduced amount. The company will negotiate with your creditors to reduce the amount you owe and settle the account. If your debts are so burdensome that you are considering bankruptcy, working with a debt settlement company can help you avoid that. A bankruptcy can stay on your credit report for 10 years, so negotiating with your creditors to lower those bills and settle those accounts is the better option. While debt settlements sound appealing, they are not without consequences. In fact, the process can even leave you in a less favorable position than you originally were. Understanding the drawbacks of this debt relief program can help you make the most informed decision and help you mitigate some of its negative impacts.While paying off debt usually dings your credit score by lowering your credit utilization ratio and adding another line to your payment history, \"you're not going to settle your debt and see your credit score jump up,\" says Rod Griffin, senior director of consumer education and advocacy at Experian. \"Settling your debt doesn't remove it from your credit report.\"Griffin explains that when creditors and debt collection agencies report your debt as settled, you may see a decrease in your credit score. The score reduction may not be as drastic as an account in collection, but the difference is marginal. Debt settlement may decrease your credit score and stay on your credit report for up to seven years from the debt's delinquency date.Working with a debt settlement company can also affect your credit score. While the company negotiates with your creditors, it may ask you to stop making payments on your accounts. The agency will ask you to do this so your creditors will be more inclined to settle your debt and receive a payment, says Griffin. However, Brown explains that credit scores tend to go up after graduation from the program. While your credit is down, you should focus on paying off your debt rather than applying for a new line of credit. \"When you're trying to get yourself out of debt, you shouldn't be looking to buy a new home or car, which is when credit scores really matter. Wait till you're out of the woods of debt with a stable credit score,\" says Brown.Debt settlement companies may charge you 15% to 25% of the total amount you enroll. So, if the remainder of your debt amounts to $10,000, you may pay up to $2,500 in fees for that service. Griffin says that money could go toward paying down a portion of your debt instead of the debt settlement company.If you opt to work with a debt settlement company, remember that it's illegal for companies to charge fees before successfully settling your debt, according to the Federal Trade Commission (FTC). Usually, you only start payments after establishing a plan and making your first payments.The Internal Revenue Service (IRS) considers your settled debt taxable income, so you may have to pay taxes on the forgiven debt. After you settle your debt, your creditor may send you a form 1099-C or the Cancellation of Debt form. Even if you don't receive this form, you must still report the settled amount on your tax returns.Debt settlement companies must abide by guidelines set by the FTC. A company can't charge any fees before settling your debt, and they must disclose risks associated with debt settlement. You can determine a debt settlement company's legitimacy by verifying its status with the Better Business Bureau, American Fair Credit Council (AFCC), International Association of Professional Debt Arbitrators (IAPDA), or the Association of Settlement companies, says Brown. You can also check your state's attorney general's office and the Consumer Financial Protection Bureau (CFPB) to find a reputable organization.While you vet debt settlement companies, be sure to ask about costs, how fees will be paid, and the projected timeframe of its debt settlement program.Steer clear of companies that guarantee results and avoid answering your questions. If a company won't give you a straight answer on how much you'll owe for its services, it's a serious red flag, says Brown.Unsolicited robocalls from a debt settlement company indicate the company is fraudulent.Debt settlement is one of many ways to crush your debt. However, it should be reserved for dire situations with no alternative. If you want to keep your credit score intact and avoid lofty fees, you may be interested in other debt relief programs.Debt consolidation combines multiple high-interest debts into a single large debt. This relief solution makes your debt payments more manageable, and the best debt consolidation loans have lower interest rates than your current debts.You do have to qualify for a personal loan to get favorable interest rates, which may only be possible if you have a good credit score. A debt consolidation loan will also result in a hard inquiry on your credit reports.Like a debt consolidation loan, a balance transfer credit card allows you to consolidate high-interest credit card debt onto another credit card. Like with a debt consolidation loan, you will incur a hard inquiry on your credit report when you apply for a balance transfer card. The best balance transfer cards have 0% introductory rates for the first 12 to 24 months and waive balance transfer fees. You'll want to try and pay off as much of your debt as possible — ideally all of it — within that introductory period. Once that promotional period ends, you will be charged interest on the outstanding balance.A debt management plan helps you pay off unsecured debt and prepares you for financial success. A nonprofit credit counselor will evaluate your financial situation and determine the proper course of action. If your credit counselor determines that a debt management plan suits you, they'll work with your creditors to reduce your interest payments, waive late fees, and reduce your monthly payments in exchange for longer payment terms. Your credit counselors will require you to make a monthly payment, which they will disburse across your accounts.Unlike debt settlements, a debt management plan doesn't change the amount you owe, just how you pay it. Debt management plans generally also take longer than debt settlements; however, your credit score won't suffer in the process. In fact, it will likely increase as you continue to make your debt payments. Debt settlement may be the right tool for some, but for many, it isn't, says Griffin. Griffin suggests that debt settlement may be appropriate if you struggle to repay your debt on a single account. Settling your debt on one account may hurt your credit score, but it won't do as much harm as settling debt on multiple accounts. That said, most debt settlement companies will only accept you as a customer if your debts exceed $10,000.If you have multiple debts and anticipate challenges in paying those debts off, speak to your creditor about alternative repayment plans. A nonprofit credit counselor can also help you choose the right debt relief program for your situation, says Griffin. They usually offer a free consultation.Consumers with large amounts of unsecured debt who struggle to make their minimum monthly payments and are on the verge of bankruptcy may benefit from a debt settlement program. However, if you have secured debts, can afford the minimum monthly payments, and are at risk of being sued by creditors or debt collectors (debt settlement doesn't offer legal protection), consider pursuing an alternative debt relief program, says Brown.Debt settlement is only worth the cost for borrowers without a better option. It may be worth it for borrowers with a single outstanding debt payment and those who are considering bankruptcy. A debt consolidation loan, a debt management plan, or a balance transfer credit card may be better choices for most people. Yes, settling a debt for less than you owe will affect your credit score. The fact that you settled your debt means that you paid less than what you owed a lender, which could be a red flag to potential creditors in the future.The debt settlement process can take between 24 to 48 months, depending on how much you owe and if the creditor is willing to negotiate.Consumers generally save 30% on their original debt amount with a debt settlement program, according to the American Fair Credit Council. Once your debt is settled, your debt collector will report your account as settled or partially paid, which stays on your credit history for up to seven years. While a debt settlement doesn't look great on your credit report, it's much better than an unpaid debt. Although debt settlement is very common, a creditor may refuse to negotiate on a debt that you rightfully owe. If negotiations fail and the debt is too much for you to pay, you may have to consider credit counseling or even bankruptcy.","articleSection":"Personal Finance, Credit, Credit Score","isAccessibleForFree":true,"hasPart":[{"@type":"WebPageElement","isAccessibleForFree":true,"cssSelector":".content-lock-content"}]} </script> <script type="application/ld+json"> {"@context":"https://schema.org","@type":"FAQPage","mainEntity":[{"@type":"Question","name":"Are debt settlement companies worth the cost?","acceptedAnswer":{"@type":"Answer","text":"<p class=\"faq-answer\">Debt settlement is only worth the cost for borrowers without a better option. It may be worth it for borrowers with a single outstanding debt payment and those who are considering bankruptcy. 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</a> </li> <li> <a href="#faq" class="sticky-toc-link headline-semibold" data-track-click="{"product_field":"sticky","event":"navigation","element_name":"table_of_contents","click_path":"bi_value_unassigned"}" > FAQ </a> </li> </menu> </nav> </aside> <div> <section class="post-content typography with-sticky-toc-aside pfi-post" data-track-content="" data-post-type="post" > <div id="piano-inline-content-wrapper" data-piano-inline-content-wrapper data-user-status="anonymous" > <div data-component-type="content-lock" data-load-strategy="exclude"> <div class="content-lock-content"> <div class="table-of-contents table-of-contents-sticky" data-analytics-module="jump-to" data-type="custom"></div><p></p><ul class="summary-list"><li>A debt settlement lowers the amount of debt you owe your creditors.</li><li>You can negotiate a debt settlement yourself, but hiring a debt settlement company gives you a higher chance of success.</li><li>Debt settlement companies can be expensive, and you'll have to pay income tax on settled debt.</li></ul><p>Negotiating a debt settlement with your creditors can significantly reduce the amount you owe. Debt settlement is a legitimate debt relief option if you're swimming in debt. However, it isn't a decision to take lightly. </p><p>Debt settlement is a process that takes time and effort. Settling your debt through a third-party service can come with a hefty fee, and you may have to pay taxes on the amount you saved. Additionally, this process can severely hurt your <a target="_blank" class="" href="https://www.businessinsider.com/personal-finance/credit-score/credit-score-basics" data-analytics-product-module="body_link" rel="">credit score</a>.</p><iframe data-load-strategy="lazy" data-src="https://products.gobankingrates.com/pub/4a1ed106-7289-11ed-9a44-0a919b37cd73" scrolling="no" frameborder="0" width="100%" height="139px" style="max-width:595px;max-height:150px;"></iframe><h2 id="debt-settlement-explained" data-toc-id="ef8ae967-f654-402d-be54-d5a43fbca030" data-toc-label="Debt settlement explained" class="toc-anchor">What is debt settlement? </h2><h3 id="4283d2ea-1a1c-489a-82d4-fb89f74e1a29" data-toc-id="4283d2ea-1a1c-489a-82d4-fb89f74e1a29">The basic principles of debt settlement</h3><p>Debt settlement is a <a target="_blank" href="https://www.businessinsider.com/personal-finance/what-is-debt-relief" data-analytics-product-module="body_link" rel="">debt relief</a> program in which you negotiate with a creditor to reduce your debt if you pay a lump sum payment on the spot. </p><p>You can take the DIY approach by negotiating directly with your creditor or debt collector to settle your debt. However, you'll need to be patient and determined during the process, as the goal of a collections agent is to recoup as much of your debt as possible, says Natalia Brown, chief client operations officer at <a target="_blank" rel="noopener nofollow" href="https://www.nationaldebtrelief.com/" data-analytics-product-module="body_link">National Debt Relief</a>. </p><p>Alternatively, you can work with a debt relief company that will negotiate with your creditors on your behalf for a fee, usually as a percentage of the total enrolled debt. Going through a debt settlement plan will take significantly longer, generally around three to four years.</p><p>Working with a debt settlement company may increase the odds your creditors will agree to a debt settlement. "Debt settlement companies can leverage the power of their client base to help negotiate rates versus rates individuals acting on their own may receive," says Brown.</p><p><strong>Related</strong>: The <a target="_blank" href="https://www.businessinsider.com/personal-finance/the-credit-pros-review" data-analytics-product-module="body_link" rel="">best loans for fair credit</a> »</p><p>Under a plan offered by a debt settlement company, you stop paying your credit bills and deposit money into a savings account instead. Once you reach an amount the debt settlement company determines is adequate, they negotiate with your creditors for a lower debt amount. All that money you saved is then used to pay off the settled amount.</p><h3 id="what-types-of-debts-can-be-settled?" data-toc-id="3b91b105-e53e-4cb7-838b-4cddc6f17830" data-toc-label="What types of debts can be settled?" class="toc-anchor">What types of debts can be settled?</h3><p>You can settle most types of <a target="_blank" href="https://www.businessinsider.com/personal-finance/what-is-an-unsecured-loan" data-analytics-product-module="body_link" rel="">unsecured debt</a>, like medical bills, credit card debt, personal loans, payday loans, business loans, and sometimes private student loans. </p><p>You can't settle secured debt like mortgages or auto loans. You also can't settle federal student loans or tax debts. </p> <aside class="quick-tip headline-regular ignore-typography"> <p><strong>Note:</strong> Most debt settlement companies don't advertise an official minimum debt to qualify for a program, but they generally only handle debts over $10,000.</p> </aside> <h2 id="the-debt-settlement-process" data-toc-id="49f2e51d-ecde-4004-93e7-38c696d8f73d" data-toc-label="The debt settlement process" class="toc-anchor">The debt settlement process</h2><p>The first step is the initial meeting and setting up a plan. You will have a meeting with the debt settlement counselor and go over all your debt and develop a plan for negotiating with your creditors, reducing the amounts, and paying off what is owed. </p><p>The debt settlement company will then contact your creditors and start the negotiation process. Although the company has done this many times before, these agreements do not happen overnight. Understand that you're asking your creditors to agree to accept less than they are owed. </p><p>Once a settlement amount is reached, you will pay that amount, either all at once or through an agreed-upon payment plan. </p><h2 id="benefits-of-debt-settlement" data-toc-id="c2442191-1c3a-439d-b820-44a779013516" data-toc-label="Benefits of debt settlement" class="toc-anchor">Benefits of debt settlement</h2><p>By working with a debt settlement company, you have the potential to pay off your debt at a reduced amount. The company will negotiate with your creditors to reduce the amount you owe and settle the account. </p><p>If your debts are so burdensome that you are considering bankruptcy, working with a debt settlement company can help you avoid that. A bankruptcy can stay on your credit report for 10 years, so negotiating with your creditors to lower those bills and settle those accounts is the better option. </p><h2 id="risks-and-considerations-" data-toc-id="1b9bc4f7-c43f-447b-b47f-d8057d967a11" data-toc-label="Risks and considerations " class="toc-anchor">Risks and considerations </h2><p>While debt settlements sound appealing, they are not without consequences. In fact, the process can even leave you in a less favorable position than you originally were. Understanding the drawbacks of this debt relief program can help you make the most informed decision and help you mitigate some of its negative impacts.</p><h3 id="efbab035-33d4-42c4-9d41-31a5cc73c39d" data-toc-id="efbab035-33d4-42c4-9d41-31a5cc73c39d">Lowered credit score</h3><p>While paying off debt usually dings your credit score by lowering your credit utilization ratio and adding another line to your payment history, "you're not going to settle your debt and see your credit score jump up," says Rod Griffin, senior director of consumer education and advocacy at <a target="_blank" rel="noopener nofollow" href="https://www.experian.com/" data-analytics-product-module="body_link">Experian</a>. "Settling your debt doesn't remove it from your credit report."</p><p>Griffin explains that when creditors and debt collection agencies report your debt as settled, you may see a decrease in your credit score. The score reduction may not be as drastic as an account in collection, but the difference is marginal. Debt settlement may decrease your credit score and stay on your credit report for up to seven years from the debt's delinquency date.</p><p>Working with a debt settlement company can also affect your credit score. While the company negotiates with your creditors, it may ask you to stop making payments on your accounts. The agency will ask you to do this so your creditors will be more inclined to settle your debt and receive a payment, says Griffin. </p><p>However, Brown explains that credit scores tend to go up after graduation from the program. While your credit is down, you should focus on paying off your debt rather than applying for a new line of credit. "When you're trying to get yourself out of debt, you shouldn't be looking to buy a new home or car, which is when credit scores really matter. Wait till you're out of the woods of debt with a stable credit score," says Brown.</p><h3 id="d7784c42-a570-4e8a-9d52-1615c59a64d0" data-toc-id="d7784c42-a570-4e8a-9d52-1615c59a64d0">High fees</h3><p>Debt settlement companies may charge you 15% to 25% of the total amount you enroll. So, if the remainder of your debt amounts to $10,000, you may pay up to $2,500 in fees for that service. Griffin says that money could go toward paying down a portion of your debt instead of the debt settlement company.</p><p>If you opt to work with a debt settlement company, remember that it's illegal for companies to charge fees before successfully settling your debt, according to the <a target="_blank" rel="noopener" href="https://www.ftc.gov/business-guidance/resources/debt-relief-services-telemarketing-sales-rule-guide-business" data-analytics-product-module="body_link">Federal Trade Commission (FTC)</a>. Usually, you only start payments after establishing a plan and making your first payments.</p><h3 id="de51d43e-a145-493e-add9-57f39f13c870" data-toc-id="de51d43e-a145-493e-add9-57f39f13c870">Taxes on the settled debt</h3><p>The <a target="_blank" rel="noopener" href="https://www.irs.gov/taxtopics/tc431" data-analytics-product-module="body_link">Internal Revenue Service (IRS)</a> considers your settled debt taxable income, so you may have to pay taxes on the forgiven debt. After you settle your debt, your creditor may send you a form <a target="_blank" href="https://www.businessinsider.com/1099-c-in-the-mail-how-to-avoid-taxes-on-cancelled-debt-2012-9" data-analytics-product-module="body_link" rel="">1099-C or the Cancellation of Debt form</a>. Even if you don't receive this form, you must still report the settled amount on your tax returns.</p><h2 id="how-to-find-a-debt-settlement-company" data-toc-id="54408b3f-abaa-4973-a5e2-0255936d9e55" data-toc-label="How to find a debt settlement company" class="toc-anchor">Choosing a debt settlement company</h2><h3 id="2a321844-295e-4787-aa97-9788b8de6b75" data-toc-id="2a321844-295e-4787-aa97-9788b8de6b75">What to look for in a reputable service </h3><p>Debt settlement companies must abide by guidelines set by the FTC. A company can't charge any fees before settling your debt, and they must disclose risks associated with debt settlement. </p><p>You can determine a debt settlement company's legitimacy by verifying its status with the Better Business Bureau, American Fair Credit Council (AFCC), International Association of Professional Debt Arbitrators (IAPDA), or the Association of Settlement companies, says Brown. You can also check your state's attorney general's office and the <a target="_blank" rel="noopener" href="https://www.consumerfinance.gov/" data-analytics-product-module="body_link">Consumer Financial Protection Bureau</a> (CFPB) to find a reputable organization.</p><p>While you vet debt settlement companies, be sure to ask about costs, how fees will be paid, and the projected timeframe of its debt settlement program.</p><h3 id="21102574-0f0d-45ba-98a7-9227aa7bfbb0" data-toc-id="21102574-0f0d-45ba-98a7-9227aa7bfbb0">Red flags and warning signs</h3><p>Steer clear of companies that guarantee results and avoid answering your questions. If a company won't give you a straight answer on how much you'll owe for its services, it's a serious red flag, says Brown.</p><p>Unsolicited robocalls from a debt settlement company indicate the company is fraudulent.</p><h2 id="alternatives-to-debt-settlement" data-toc-id="c4fec4ef-935c-497e-9a39-b7cbddd3e7af" data-toc-label="Alternatives to debt settlement" class="toc-anchor">Alternatives to debt settlement</h2><p>Debt settlement is one of many ways to crush your debt. However, it should be reserved for dire situations with no alternative. If you want to keep your credit score intact and avoid lofty fees, you may be interested in other debt relief programs.</p><h3 id="50719612-983c-4b04-b0a0-dfb15b356cbc" data-toc-id="50719612-983c-4b04-b0a0-dfb15b356cbc">Debt consolidation loan</h3><p>Debt consolidation combines multiple high-interest debts into a single large debt. This relief solution makes your debt payments more manageable, and the <a target="_blank" href="https://www.businessinsider.com/personal-finance/best-debt-consolidation-loans" data-analytics-product-module="body_link" rel="">best debt consolidation loans</a> have lower interest rates than your current debts.</p><p>You do have to qualify for a personal loan to get favorable interest rates, which may only be possible if you have a good credit score. A debt consolidation loan will also result in a <a target="_blank" href="https://www.businessinsider.com/personal-finance/what-is-hard-inquiry-how-affect-credit-score" data-analytics-product-module="body_link" rel="">hard inquiry</a> on your credit reports.</p><h3 id="5a924803-2ac9-4842-8bdc-fa4dd7311ab9" data-toc-id="5a924803-2ac9-4842-8bdc-fa4dd7311ab9">Balance transfer credit cards</h3><p>Like a debt consolidation loan, a balance transfer credit card allows you to consolidate high-interest credit card debt onto another credit card. Like with a debt consolidation loan, you will incur a hard inquiry on your credit report when you apply for a balance transfer card. </p><p>The <a target="_blank" href="https://www.businessinsider.com/personal-finance/best-balance-transfer-credit-cards" data-analytics-product-module="body_link" rel="">best balance transfer cards</a> have 0% introductory rates for the first 12 to 24 months and waive balance transfer fees. You'll want to try and pay off as much of your debt as possible — ideally all of it — within that introductory period. Once that promotional period ends, you will be charged interest on the outstanding balance.</p><h3 id="bbc49056-f7eb-433e-8d69-8f3238af09e1" data-toc-id="bbc49056-f7eb-433e-8d69-8f3238af09e1">Debt management plan</h3><p>A <a target="_blank" href="https://www.businessinsider.com/personal-finance/what-is-debt-management-plan" data-analytics-product-module="body_link" rel="">debt management plan</a> helps you pay off unsecured debt and prepares you for financial success. </p><p>A nonprofit <a target="_blank" href="https://www.businessinsider.com/personal-finance/what-is-credit-counseling" data-analytics-product-module="body_link" rel="">credit counselor</a> will evaluate your financial situation and determine the proper course of action. If your credit counselor determines that a debt management plan suits you, they'll work with your creditors to reduce your interest payments, waive late fees, and reduce your monthly payments in exchange for longer payment terms. Your credit counselors will require you to make a monthly payment, which they will disburse across your accounts.</p><p>Unlike debt settlements, a debt management plan doesn't change the amount you owe, just how you pay it. Debt management plans generally also take longer than debt settlements; however, your credit score won't suffer in the process. In fact, it will likely increase as you continue to make your debt payments.  </p><div class="myFinance-widget" data-widget-id="bf462ab2-8e6a-4f05-ad8c-5985fec1bcc6" data-campaign="bizin-invest-fam-spl" data-sub-id="PLACESUBIDHERE"> </div> <div class="script" data-lazy-load="script" data-load-strategy="lazy" data-consent="MARKETING" data-src="https://static.myfinance.com/widget/myFinance.js" data-async="true" data-defer="true"></div> <h2 id="is-debt-settlement-right-for-you?" data-toc-id="7d759434-bd6f-430c-981b-4e9e98f8acb5" data-toc-label="Is debt settlement right for you?" class="toc-anchor">Is debt settlement right for you?</h2><p>Debt settlement may be the right tool for some, but for many, it isn't, says Griffin. </p><p>Griffin suggests that debt settlement may be appropriate if you struggle to repay your debt on a single account. Settling your debt on one account may hurt your credit score, but it won't do as much harm as settling debt on multiple accounts. That said, most debt settlement companies will only accept you as a customer if your debts exceed $10,000.</p><p>If you have multiple debts and anticipate challenges in paying those debts off, speak to your creditor about alternative repayment plans. A nonprofit credit counselor can also help you choose the right debt relief program for your situation, says Griffin. They usually offer a free consultation.</p><p>Consumers with large amounts of unsecured debt who struggle to make their minimum monthly payments and are on the verge of bankruptcy may benefit from a debt settlement program. However, if you have secured debts, can afford the minimum monthly payments, and are at risk of being sued by creditors or debt collectors (debt settlement doesn't offer legal protection), consider pursuing an alternative debt relief program, says Brown.</p><h2 id="faq" data-toc-id="ba8a4bad-2ad9-44cb-ab2a-8938bac427ae" data-toc-label="FAQ" class="toc-anchor">Debt settlement frequently asked questions (FAQ)</h2> <div class="collapsable-faq collapsable-faq-dropdown" data-parent-index="" data-component-type="collapsable-faq" data-root-margin="0px 0px 100% 0px"> <div class="collapsable-faq-dropdown_header"> <span class="collapsable-faq-dropdown_text headline-semibold faq-question"> Are debt settlement companies worth the cost? </span> <span class="collapsable-faq-dropdown_chevron"> <svg class="svg-icon chevron-icon " data-chevron-icon="" role="img" xmlns="http://www.w3.org/2000/svg" width="1em" height="1em" viewBox="0 0 14.4 8.4" id="chevron-icon"> <title>Chevron icon</title> <desc>It indicates an expandable section or menu, or sometimes previous / next navigation options.</desc> <path class="chevron" fill="none" stroke="#76767a" stroke-linecap="square" d="M.7.7l6.5 7 6.5-7"></path> </svg> </span> </div> <div class="collapsable-faq-dropdown_wrap"> <div class="collapsable-faq-dropdown_content"> <p class="faq-answer">Debt settlement is only worth the cost for borrowers without a better option. It may be worth it for borrowers with a single outstanding debt payment and those who are considering bankruptcy. A debt consolidation loan, a debt management plan, or a balance transfer credit card may be better choices for most people. </p> </div> </div> </div> <div class="collapsable-faq collapsable-faq-dropdown" data-parent-index="" data-component-type="collapsable-faq" data-root-margin="0px 0px 100% 0px"> <div class="collapsable-faq-dropdown_header"> <span class="collapsable-faq-dropdown_text headline-semibold faq-question"> Will settling a debt for less than I owe affect my credit score? </span> <span class="collapsable-faq-dropdown_chevron"> <svg class="svg-icon chevron-icon " data-chevron-icon="" role="img" xmlns="http://www.w3.org/2000/svg" width="1em" height="1em" viewBox="0 0 14.4 8.4" id="chevron-icon"> <title>Chevron icon</title> <desc>It indicates an expandable section or menu, or sometimes previous / next navigation options.</desc> <path class="chevron" fill="none" stroke="#76767a" stroke-linecap="square" d="M.7.7l6.5 7 6.5-7"></path> </svg> </span> </div> <div class="collapsable-faq-dropdown_wrap"> <div class="collapsable-faq-dropdown_content"> <p class="faq-answer">Yes, settling a debt for less than you owe will affect your credit score. The fact that you settled your debt means that you paid less than what you owed a lender, which could be a red flag to potential creditors in the future.</p> </div> </div> </div> <div class="collapsable-faq collapsable-faq-dropdown" data-parent-index="" data-component-type="collapsable-faq" data-root-margin="0px 0px 100% 0px"> <div class="collapsable-faq-dropdown_header"> <span class="collapsable-faq-dropdown_text headline-semibold faq-question"> How long does the debt settlement process typically take? </span> <span class="collapsable-faq-dropdown_chevron"> <svg class="svg-icon chevron-icon " data-chevron-icon="" role="img" xmlns="http://www.w3.org/2000/svg" width="1em" height="1em" viewBox="0 0 14.4 8.4" id="chevron-icon"> <title>Chevron icon</title> <desc>It indicates an expandable section or menu, or sometimes previous / next navigation options.</desc> <path class="chevron" fill="none" stroke="#76767a" stroke-linecap="square" d="M.7.7l6.5 7 6.5-7"></path> </svg> </span> </div> <div class="collapsable-faq-dropdown_wrap"> <div class="collapsable-faq-dropdown_content"> <p class="faq-answer">The debt settlement process can take between 24 to 48 months, depending on how much you owe and if the creditor is willing to negotiate.</p> </div> </div> </div> <div class="collapsable-faq collapsable-faq-dropdown" data-parent-index="" data-component-type="collapsable-faq" data-root-margin="0px 0px 100% 0px"> <div class="collapsable-faq-dropdown_header"> <span class="collapsable-faq-dropdown_text headline-semibold faq-question"> What percentage do debt collectors settle for? </span> <span class="collapsable-faq-dropdown_chevron"> <svg class="svg-icon chevron-icon " data-chevron-icon="" role="img" xmlns="http://www.w3.org/2000/svg" width="1em" height="1em" viewBox="0 0 14.4 8.4" id="chevron-icon"> <title>Chevron icon</title> <desc>It indicates an expandable section or menu, or sometimes previous / next navigation options.</desc> <path class="chevron" fill="none" stroke="#76767a" stroke-linecap="square" d="M.7.7l6.5 7 6.5-7"></path> </svg> </span> </div> <div class="collapsable-faq-dropdown_wrap"> <div class="collapsable-faq-dropdown_content"> <p class="faq-answer">Consumers generally save 30% on their original debt amount with a debt settlement program, according to the <a target="_blank" rel="noopener nofollow sponsored" href="https://americanfaircreditcouncil.org/facts-about-debt-settlement/" data-analytics-product-module="body_link">American Fair Credit Council</a>. </p> </div> </div> </div> <div class="collapsable-faq collapsable-faq-dropdown" data-parent-index="" data-component-type="collapsable-faq" data-root-margin="0px 0px 100% 0px"> <div class="collapsable-faq-dropdown_header"> <span class="collapsable-faq-dropdown_text headline-semibold faq-question"> What happens when a debt is settled? </span> <span class="collapsable-faq-dropdown_chevron"> <svg class="svg-icon chevron-icon " data-chevron-icon="" role="img" xmlns="http://www.w3.org/2000/svg" width="1em" height="1em" viewBox="0 0 14.4 8.4" id="chevron-icon"> <title>Chevron icon</title> <desc>It indicates an expandable section or menu, or sometimes previous / next navigation options.</desc> <path class="chevron" fill="none" stroke="#76767a" stroke-linecap="square" d="M.7.7l6.5 7 6.5-7"></path> </svg> </span> </div> <div class="collapsable-faq-dropdown_wrap"> <div class="collapsable-faq-dropdown_content"> <p class="faq-answer">Once your debt is settled, your debt collector will report your account as settled or partially paid, which stays on your credit history for up to seven years. While a debt settlement doesn't look great on your credit report, it's much better than an unpaid debt. </p> </div> </div> </div> <div class="collapsable-faq collapsable-faq-dropdown collapsable-faq-dropdown-last" data-parent-index="" data-component-type="collapsable-faq" data-root-margin="0px 0px 100% 0px"> <div class="collapsable-faq-dropdown_header"> <span class="collapsable-faq-dropdown_text headline-semibold faq-question"> What should I do if a creditor refuses to negotiate a settlement? </span> <span class="collapsable-faq-dropdown_chevron"> <svg class="svg-icon chevron-icon " data-chevron-icon="" role="img" xmlns="http://www.w3.org/2000/svg" width="1em" height="1em" viewBox="0 0 14.4 8.4" id="chevron-icon"> <title>Chevron icon</title> <desc>It indicates an expandable section or menu, or sometimes previous / next navigation options.</desc> <path class="chevron" fill="none" stroke="#76767a" stroke-linecap="square" d="M.7.7l6.5 7 6.5-7"></path> </svg> </span> </div> <div class="collapsable-faq-dropdown_wrap"> <div class="collapsable-faq-dropdown_content"> <p class="faq-answer">Although debt settlement is very common, a creditor may refuse to negotiate on a debt that you rightfully owe. If negotiations fail and the debt is too much for you to pay, you may have to consider credit counseling or even bankruptcy. </p> </div> </div> </div><iframe data-src="https://products.gobankingrates.com/pub/63fc102c-ec11-4275-8058-84bf3767dcc9?targeting[subcategory]=credit&resize=1&ident=99&pub_inventory=credit-score/what-is-debt-settlement-pfi-credit" data-indent="99" scrolling="no" frameborder="0" width="100%" style="min-width:300px;max-height:475px;"></iframe> <script async="" type="text/javascript" id="go-banking-resize"> window.addEventListener('message', onGoBankingResize, false); function onGoBankingResize(e) { { if (e.origin === 'https://products.gobankingrates.com' && e.data) { if (e.data.source && e.data.id && undefined !== e.data.height) { var id = 'iframe[data-indent="' + e.data.id + '"]'; var chosenFrame = document.querySelector(id); if (chosenFrame) { var height = e.data.height + 'px'; chosenFrame.style.height = height; } } } } } </script><section class="post-authors" data-component-type="post-author"> <div class="post-author"> <a id="post-author_profile-link" href="https://www.businessinsider.com/author/jennifer-streaks" target="_blank" data-analytics-product-module="author-bio" rel=""> <div class="author-profile-image-wrapper" data-slug="jennifer-streaks"> <div class="lazy-holder author-profile-image"> <img class="lazy-image author-profile-image" src="data:image/svg+xml,%3Csvg xmlns='http://www.w3.org/2000/svg' viewBox='0 0 1 1'%3E%3C/svg%3E" data-src="https://i.insider.com/62f3e3cecc15bf00182fc9c4?crop=1:1&width=256&format=jpeg&auto=webp" alt="Jennifer Streaks"> <noscript> <img class="no-script" src="https://i.insider.com/62f3e3cecc15bf00182fc9c4?crop=1:1&width=256&format=jpeg&auto=webp" /> </noscript> </div> </div> </a> <div class="post-author_info"> <div class="post-author_top"> <a id="post-author_name-link" class="post-author_link not-content-link" href="https://www.businessinsider.com/author/jennifer-streaks" target="_blank" data-analytics-product-module="author-bio" rel=""> <div class="post-author_name headline-semibold">Jennifer Streaks</div> </a> <div class="post-author_title headline-regular">Senior Personal Finance Reporter and Spokesperson</div> </div> <div class="post-author_bio headline-regular"> <input type="checkbox" id="expanded0"> <div class="post-author_bio_content"> <span>Jennifer Streaks is a Personal Finance Expert and Journalist who writes about credit and all things money for Business Insider. Committed to financial literacy and economic empowerment, she has covered financial topics for over a decade, writing about her own experiences and sharing her expertise to give consumers actionable financial advice.</span><span>Along with exploring credit scores, credit reports, and how to build credit, Jennifer analyzes how current economic trends impact everyday people and offers her expert advice on budgeting, saving, and growing wealth in today’s economy. She regularly appears as an on-air financial commentator on programs like Good Morning America, Yahoo! Finance, CBS, and MSNBC.</span><span><span class="headline-semibold">Experience</span></span><span>Before joining Business Insider, Jennifer was a financial contributor for CNBC and covered personal finance, entrepreneurship, tech, and the economy for Forbes. Her work has appeared in TheGrio, Black Enterprise, and USA Today. </span><span>Jennifer is also the author of "<a href="https://www.amazon.com/Thrive-Affordably-month-month-breaking/dp/0692625941" rel=" nofollow">Thrive! ... Affordably: Your Month-to-Month Guide to Living Your Best Life Without Breaking the Bank</a>." The book offers advice, tips, and financial management lessons geared toward helping the reader highlight strengths, identify missteps, and take control of their finances.</span><span>Jennifer’s most important financial advice to her friends is to <em>always</em> have an emergency fund.</span><span><span class="headline-semibold">Expertise</span></span><span>Jennifer’s expertise includes:</span><ul><li><span>Credit scores</span></li><li><span>Credit history</span></li><li><span>Credit reports</span></li><li><span>Budgeting</span></li><li><span>Saving </span></li><li><span>Housing </span></li><li><span>Retirement</span></li><li><span>The economy</span></li><li><span>Financial trends</span></li></ul><span><span class="headline-semibold">Education</span></span><span>Jennifer earned an MBA from The Johns Hopkins University Carey School of Business and completed the Wharton Seminar for Business Journalists.</span><span>Jennifer is based in New York City.</span> </div> <label for="expanded0" role="button" class="post-author_bio_more">Read more</label> <label for="expanded0" role="button" class="post-author_bio_less">Read less</label> </div> </div> </div> <div class="post-author"> <a id="post-author_profile-link" href="https://www.businessinsider.com/author/alani-asis" target="_blank" data-analytics-product-module="author-bio" rel=""> <div class="author-profile-image-wrapper" data-slug="alani-asis"> <div class="lazy-holder author-profile-image"> <img class="lazy-image author-profile-image" src="data:image/svg+xml,%3Csvg xmlns='http://www.w3.org/2000/svg' viewBox='0 0 1 1'%3E%3C/svg%3E" data-src="https://i.insider.com/61ddd0074ede320018b706d6?crop=1:1&width=256&format=jpeg&auto=webp" alt="Photo of Alani Asis"> <noscript> <img class="no-script" src="https://i.insider.com/61ddd0074ede320018b706d6?crop=1:1&width=256&format=jpeg&auto=webp" /> </noscript> </div> </div> </a> <div class="post-author_info"> <div class="post-author_top"> <a id="post-author_name-link" class="post-author_link not-content-link" href="https://www.businessinsider.com/author/alani-asis" target="_blank" data-analytics-product-module="author-bio" rel=""> <div class="post-author_name headline-semibold">Alani Asis</div> </a> </div> <div class="post-author_bio headline-regular"> <input type="checkbox" id="expanded1"> <div class="post-author_bio_content"> <span>Alani Asis is a personal finance expert with experience covering insurance, retirement, and credit. Her work has been published in AARP, CNN Underscored, Forbes, Fortune, PolicyGenius, and U.S. News & World Report.</span><span><span class="headline-semibold">Experience</span></span><span>Alani has reviewed life insurance and pet insurance companies and has written numerous explainers on travel insurance, credit, debt, and home insurance.</span><span>She is passionate about demystifying the complexities of insurance and other personal finance topics so that readers have the information they need to make the best money decisions.</span><span><span class="headline-semibold">Expertise</span></span><span>Alani’s areas of personal finance expertise include:</span><ul><li><span>Car insurance</span></li><li><span>Life insurance</span></li><li><span>Home insurance</span></li><li><span>Travel insurance</span></li><li><span>Pet insurance</span></li><li><span>Credit</span></li><li><span>Credit cards</span></li><li><span>Retirement planning</span></li></ul><span><span class="headline-semibold">Education </span></span><span>Alani is a graduate of the University of Hawaii at Manoa, where she earned a degree in political science and history.</span> </div> <label for="expanded1" role="button" class="post-author_bio_more">Read more</label> <label for="expanded1" role="button" class="post-author_bio_less">Read less</label> </div> </div> </div> </section> <div class="featured-products sticky-featured-product"> <span class="headline-semibold featured-products-heading">Top Offers From Our Partners</span> <div class="featured-product"> <a href="https://secure.money.com/pr/u8327de6ed05" target="_blank" data-analytics-product-area="image" data-analytics-product-module="featured_product" data-analytics-product-index="1" data-analytics-product-brand="Right Rail - Do Not Use in Content" data-analytics-product-name="SoFi® Checking and Savings (Member FDIC)" data-analytics-product-id="63cff3349bca6000112c3c92" class="featured-product-image not-content-link" rel="nofollow noindex"> <div class="lazy-holder lazy-holder " style="padding-top: calc(100% * 95 / 149)"> <img class="lazy-image " src="data:image/svg+xml,%3Csvg xmlns='http://www.w3.org/2000/svg' viewBox='0 0 1 1'%3E%3C/svg%3E" data-content-type="image/png" data-srcs="{"https://i.insider.com/654be4c936d588dc55cd46e3":{"contentType":"image/png","aspectRatioW":1150,"aspectRatioH":304}}" alt="Sofi logo"> <noscript> <img class="no-script" src="https://i.insider.com/654be4c936d588dc55cd46e3?width=600&format=jpeg&auto=webp" /> </noscript> </div> </a> <div class="featured-product-hgroup"> <a href="https://secure.money.com/pr/u8327de6ed05" target="_blank" class="featured-product-heading not-content-link" data-analytics-product-area="title" data-analytics-product-module="featured_product" data-analytics-product-index="1" data-analytics-product-brand="Right Rail - Do Not Use in Content" data-analytics-product-name="SoFi® Checking and Savings (Member FDIC)" data-analytics-product-id="63cff3349bca6000112c3c92" rel="nofollow noindex"> SoFi® Checking and Savings (Member FDIC) </a> <span class="headline-semibold featured-product-sub-heading"> Earn up to a $300 bonus with qualifying direct deposits for eligible customers through 1/31/2026. Earn up to 3.80% APY on savings balances (including Vaults) with direct deposit or qualifying deposit. <div class="component rich-tooltip featured-product-rich-tooltip" role="tooltip" data-tooltip-position="right"> <svg class="svg-icon tooltip-icon " role="img" xmlns="http://www.w3.org/2000/svg" viewBox="0 0 60 60"> <title></title> <desc>A tooltip</desc> <path d="M30.6 36.6l.1-1.2c.2-2.3 1.3-3.3 3.4-5.2 2.5-2.3 5.7-4.5 5.7-8.6 0-5-4.3-7.7-9.2-7.7-3.8 0-6.8 1.5-10 4.4l2.2 2.5c3.1-2.5 5-3.5 7.7-3.5 3.2 0 5.4 1.7 5.4 4.4s-2.2 4.2-4.4 6.1c-3.4 2.9-4 4.1-4 7.3v1.5h3.1zm.7 8.4v-4.6h-4.4V45h4.4z"></path> <path d="M30 0c16.6 0 30 13.4 30 30S46.6 60 30 60 0 46.6 0 30 13.4 0 30 0zm0 3C15.1 3 3 15.1 3 30s12.1 27 27 27 27-12.1 27-27S44.9 3 30 3z"></path> </svg> <div class="rich-tooltip-wrapper headline-regular"> <div class="rich-tooltip-message headline-regular">SoFi members who enroll in SoFi Plus with Direct Deposit or by paying the SoFi Plus Subscription Fee every 30 days or with $5,000 or more in Qualifying Deposits during the 30-Day Evaluation Period can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. Members without either SoFi Plus or Qualifying Deposits, during the 30-Day Evaluation Period will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Only SoFi Plus members are eligible for other SoFi Plus benefits. Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. See the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.</div> </div> </div> <style>.rich-tooltip-wrapper { display: none; }</style> </span> </div> <div class="featured-product-cta"> <a href="https://secure.money.com/pr/u8327de6ed05" target="_blank" class="featured-product-link not-content-link" data-analytics-product-area="button" data-analytics-product-module="featured_product" data-analytics-product-index="1" data-analytics-product-brand="Right Rail - Do Not Use in Content" data-analytics-product-name="SoFi® Checking and Savings (Member FDIC)" data-analytics-product-id="63cff3349bca6000112c3c92" rel="nofollow noindex"> Start Saving </a> </div> </div> </div> </div> </div> </div> </section> <section class="category-tagline body-italic"> <div> <p class="body-italic"><p style="font-size:14px;"><em>Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. <a href="https://www.businessinsider.com/personal-finance/personal-finance-editorial-standards">Read our editorial standards</a>.</em></p><p style="font-size:14px;"><em>Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.</em></p><p style="font-size:14px;"><em>**Enrollment required.</em></p></p> </div> </section></div> </div> <section class="post-content-more"> <div class="inline-newsletter-signup headline-regular loading insider-today" id="formContainer" data-component-type="inline-newsletter-module" data-event-label="insider_today" data-newsletter-id="1" data-newsletter-title="Business Insider Today" data-acq-source="personalfinanceverticalinline" data-track-view={"subscription_experience":"bi_value_unassigned","product_field":"bi_value_unassigned","element_name":"inline_newsletter"} > <section class="inline-newsletter-content"> <div class="inline-newsletter-insider-today-header"> <div> <div class="inline-newsletter-logo-tag"> <div class="inline-newsletter-logo"> <div class="lazy-holder lazy-holder has-transparency" style="padding-top: calc(100% * 24 / 318)" > <img class="lazy-image has-transparency" src="data:image/svg+xml,%3Csvg xmlns='http://www.w3.org/2000/svg' viewBox='0 0 1 1'%3E%3C/svg%3E" data-src='/public/assets/BI/US/logos/newsletters/business-insider-today.svg' alt="Business Insider Today" /> <noscript> <img class="no-script" src="/public/assets/BI/US/logos/newsletters/business-insider-today.svg" /> </noscript> </div> </div> </div> <div class="newsletter-signup-header" id="signUpHeader" > Get the inside scoop on today's big stories<span class="homepage-newsletter-description-desktop"> - delivered daily</span>. </div> </div> </div> <div class="js-loader hidden"><svg class="svg-icon " version="1.1" xmlns="http://www.w3.org/2000/svg" role="img" width="50" height="50" viewBox="0 0 50 50" style="enable-background:new 0 0 50 50;" xml:space="preserve"> <path fill="#0a0a0a" d="M43.935,25.145c0-10.318-8.364-18.683-18.683-18.683c-10.318,0-18.683,8.365-18.683,18.683h4.068c0-8.071,6.543-14.615,14.615-14.615c8.072,0,14.615,6.543,14.615,14.615H43.935z"> <animateTransform attributeType="xml" attributeName="transform" type="rotate" from="0 25 25" to="360 25 25" dur="0.6s" repeatCount="indefinite"/> </path> </svg></div> <div class="error-request-message headline-regular hidden"></div> <div class="success-container__desktop d-none"> <div class="success-message-container"> <div class="success-message headline-semibold"> Thanks for signing up! 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