What Is Debt Settlement?

Wondering What is Debt Settlement? Keep reading!

Having too much debt sometimes feel like lifting a heavyweight which is holding you back in life.

Whether you are struggling with managing your debts, cannot pay your bills, or considering declaring bankruptcy, debt settlement is the cheapest way to get out of your debt and get your finances back on track. 

While this option might work well for some people, it is not risk-free.

In this guide, we’ll be talking about what debt settlement is, how it works, and the pros and cons so you can decide whether it can help you get out of debt. Let’s get started!

What Is Debt Settlement?

Key Takeaways

  • Debt Settlement involves offering a lump-sum payment to a creditor in exchange for forgiving a chunk of your debt.
  • Debt settlement is a savior for those who are facing a temporary financial setback and want to avoid bankruptcy.
  • You can do settlement yourself or by opting for a debt settlement agency.

Debt Settlement

Debt settlement is a form of debt relief or debt adjustment that allows consumers to resolve their debts for less than the current amount of their debt.

It involves offering a lump-sum payment to a creditor in exchange for a chunk of your debt being forgiven.

You can settle their debts personally or hire the best debt relief firm that acts as a middleman between you and your lender and negotiates to reduce or eliminate your debt. 

Debt settlement is the best option for someone facing a temporary but significant financial setback and considering bankruptcy as an alternative.

Read: Difference Between Debt Settlement And Debt Consolidation

How does Debt Settlement Work? 

Debt settlement is typically done with the help of a non-profit credit counseling agency, but you can also do it on your own if you are confident enough that you’ll be able to convince your creditors1

Debt settlement companies will contact your creditors on your behalf and can negotiate a better payment plan or reduce your debt for a fee, often a percentage of the amount you’d save after settling your debt.

They may also advise you to stop paying your creditors until a debt settlement agreement is settled and make regular deposits into an account controlled by you but administered by an independent third party. 

Debt settlement providers usually review all clients before they enroll to ensure they qualify for debt settlement and will be able to make necessary payments to pay back the debt. 

Once the debt settlement company successfully negotiates with your creditor, you must agree to the terms of the agreement and make at least one payment to the creditor for the settled amount. 

Read Our : Debt Relief Review Methodology

Pros and Cons

Here are some pros and cons that you must consider before agreeing:


  • It helps you get relief from unbearable debt and repay your debt faster than other routes. 
  • Also, it helps you avoid being sued for credit card debt and facing contentious court proceedings.
  • It is a great way to avoid bankruptcy that severely damages your credit score and stays on your credit report for a lifetime.


  • Debt settlement providers charge hefty fees between $300-$5000 or even more.
  • It negatively impacts your credit score that may affect your future loan term, employment opportunities, etc. 
  • Debt settlement providers hold you cash which you could be using to do better things. 
  • By stopping making late payments or interest fees, you could end up with bigger debt. 
  • You’ll still be responsible for paying taxes on the reduced debt. 

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  1. https://www1.nyc.gov/assets/dca/downloads/pdf/consumers/Consumers-Beware-Debt-Settlement-Services-English.pdf[]

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