Debt Settlement Pros and Cons

Debt Settlement Pros and Cons
Gina Freeman (Pogol)July 9, 2022
Key Takeaways:
  • Debt settlement has pros and cons.
  • Debt settlement pros include a high success rate, paying less than you owe, and protecting your privacy.
  • Debt settlement cons include no guarantees, creditors may call or even sue you, and it can be expensive.

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Debt settlement can be a good solution for people with more debt than they can afford. However, no single solution is right for everyone. You should understand the pros and cons of debt settlement before committing to a debt settlement program. 

What Is Debt Settlement and How Does it Work?

Debt settlement means convincing your unsecured creditors to accept less than your total balance as payment in full. Here’s how the process works:

  • You come up with a lump sum to offer one or more of your creditors. That means borrowing it, taking it out of savings, selling some assets, or putting money into a debt settlement savings account instead of paying your unsecured creditors. 

  • You (or your debt consultant) contact your creditors and offer them a percentage of the total due as payment in full. Often, that contact takes the form of a debt settlement letter.

  • If you reach an agreement, you or your debt consultant will draw up a written agreement and send it to the creditor for signature.

  • Only after you have a signed agreement should you send money to the creditor. It’s helpful to include a conditional endorsement referencing the written agreement when you make the payment.

Once the account is cleared, check your credit report to make sure the balance is zero. 

Debt Settlement Pros

Debt settlement can offer several advantages over other debt solutions. Here are debt settlement pros.

Privacy protection

Unlike bankruptcy, debt settlement takes place outside the court system. Bankruptcy creates a public record that anyone can find – including future employers, professional licensing agencies, romantic partners, or in-laws. If bankruptcy would embarrass you or harm you professionally, debt settlement might be a better option.

Less damage to credit scores

Debt settlement does less damage to your credit score than bankruptcy. According to FICO, if your score is 680, expect to lose 130-150 points when you file bankruptcy and 45-65 points when you settle one credit card. And if you’re starting at 780, a bankruptcy filing will cost you 220-240 points and debt settlement drops your score by 140 to 160 points.

Higher success rate

According to the FTC, debt settlement completion rates average 45% to 50%. That’s significantly higher than the success rate for credit counseling (21%) or Chapter 13 bankruptcy (33%). Only Chapter 7 bankruptcy is higher with a success rate of 96%. However, you’re only allowed to file Chapter 7 if your income is too low to repay even some of what you owe. 


The FTC states that debt settlement is more affordable than a debt management plan from a credit counseling company. That’s because debt settlement allows you to zero out debt by paying less than you owe. 


With debt settlement, you don’t owe fees unless you settle with your creditor. You cannot be forced to accept an arrangement that doesn’t appeal to you. If you file bankruptcy, you get no say in the outcome – the judge tells you what property you have to surrender or what amount you must pay. 

Debt Settlement Cons

Obviously, debt settlement is not all kittens and candy. There are some serious potential downsides, and you should be aware of them.


Your creditors will probably become very concerned if you begin missing payments to save a lump sum. They will probably contact you through the mail, online, by text, or phone. They may even choose to file a lawsuit against you, and losing could create a public record. 

No guarantee

A reputable debt settlement provider will not guarantee to “settle your accounts for pennies on the dollar” or make any similar claim. In fact, no creditor is obligated to settle with you ever. It’s possible for you to stop making payments, damage your credit score, and not reach an agreement with your creditor. That’s more likely to happen if the creditor has reason to believe that you can afford to repay your entire balance.


Professional debt settlement companies typically charge between 15% and 25% of the enrolled debt. For very large amounts, bankruptcy can be less expensive. 

The tax treatment of amounts forgiven in debt settlement can be a con if you don’t qualify as insolvent. Insolvency means your total debts exceed the value of your assets. If you’re insolvent, forgiven amounts are not taxable. But if you’re not insolvent, expect to pay taxes on forgiven amounts. 

How to Decide if Debt Settlement Is Right for You

Deciding how to tackle unaffordable debt means asking yourself these questions first.

  • Do I qualify as insolvent? If so, debt settlement becomes much more cost-effective.

  • How much debt am I trying to get rid of? For very large amounts, bankruptcy might be less expensive because lawyers tend to charge flat fees. 

  • How likely are my creditors to settle? If the debt is old, has been charged off or sold to a debt collector, debt settlement becomes easier. 

  • Can I document a financial hardship? Your creditors are more likely to forgive significant balances if your financial position is obviously weak.

  • Will a bankruptcy make me ineligible for work or embarrass me? Debt settlement might be a better option in that case.

  • Can I afford the payment of a debt management plan? If so, you’ll do less damage to your credit and avoid collection calls and potential lawsuits. 

It’s important to weigh debt settlement pros and cons before attempting to resolve your payment problems. Understanding the pros and cons of debt settlement and other options can help you choose the most effective solution for your situation. 

Achieve financial control. How much debt do you have?

Get your FREE plan now

Or speak to a debt consultant  800-910-0065

Frequently Asked Questions

What’s worse for credit scores, debt settlement or bankruptcy?


In most cases, debt settlement does less long-term damage to your credit scores than bankruptcy, according to FICO. How much harm debt settlement does to your credit depends on your starting score (if you’re already missing payments, debt settlement is unlikely to hurt you much, but if your history is perfect, expect a major hit). However, most debt settlement clients experience an increase in credit scores over time if they no longer have debt they can’t afford. 

Is debt settlement better than debt management?


The right solution for you depends on your situation. Debt management has a lower success rate than debt settlement, but that’s because many people can’t afford the monthly payment. If you can safely afford to make your debt management plan payment, it’s a good solution because it costs very little and doesn’t hurt your credit much. But if you can’t afford your debt, debt settlement may be a better way to go. The Federal Trade Commission (FTC) says that debt settlement is more affordable than debt management. 

How much debt can be forgiven with debt settlement?


The amount of debt forgiveness that you can achieve through debt settlement depends on what your creditors are willing to accept. There is no guarantee of what they will forgive. In general, older debts that have already been written off or sold to debt collectors are easier to negotiate than new debt. And if you can prove financial hardship and insolvency, creditors tend to be more forgiving.