Debt Settlement: How to Get Your Debt Under Control Now

It’s no secret that many Americans are overwhelmed with credit card debt.

If you’re struggling to make your monthly payments, here’s a secret your credit card company doesn’t want you to know — lenders will often lower the total amount that you owe them through a negotiation process.

That process is known as debt settlement. But debt settlement won’t be the best choice for everyone. The key is to figure out whether it will work for you.

Key takeaways

  • Only unsecured debts are eligible
  • Most debt settlement companies require you to have at least $7,500 in unsecured debt (or $1,000 in payday loan debt)
  • You won’t pay any upfront fees
  • A third-party debt settlement company handles the negotiations with your creditors or debt collectors on your behalf
  • Your credit score will take an initial hit, but it will be temporary
  • Creditors are not obligated to settle, so there’s a possibility it may not work with every creditor
  • It will take two to four years to complete a debt settlement program successfully
  • You’ll get out of debt while paying less than the full amount you owe
  • You don’t pay a debt settlement company anything at all until after debts have been settled

What you need to know about debt settlement

It’s not as expensive as you might think

Debt settlement might seem expensive. A typical debt settlement company typically charges a fee of between 15% to 27% of the total debt you enroll in the program. However, because you’ll end up paying creditors less than what you owe, you’ll still save money.

According to the American Association for Debt Resolution, a typical debt settlement customer will save 32% of their total enrolled debt on average after fees. This means that the average customer who enrolls $10,000 in the program will end up repaying a total of $6,800 after fees for a savings of $3,200.

Calculate your savings using the calculator below.

How much unsecured debt do you currently have?

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$1,000 $100,000

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Pro tip: The American Association for Debt Resolution was previously known as the American Fair Credit Council.

READ MORE: How debt settlement works

Only unsecured debts are eligible

Secured debts are not eligible for debt settlement. This includes loans that are secured by the item you used the loan proceeds to purchase, including cars and homes.

However, if you have more than $7,500 in unsecured debts (this includes credit card bills, medical bills, personal loans and even some student loans, you will be a good candidate for debt settlement.

Pro tip: Debt settlement won’t work for every type of unsecured debt. For example, alimony, child support and back taxes are not eligible for settlement.

It can take two to four years

The debt settlement process is not simple. It will usually take two to four years to complete a program successfully. However, because you’re not doing the work, all you really need to worry about once you’ve enrolled is making a single monthly deposit and officially approving any settlements.

READ MORE: Debt settlement companies

How debt settlement works

Most debt settlement companies will ask you to stop making monthly payments on your unsecured debts. 

The reason behind this is simple: Most creditors are not willing to even consider debt settlement until your account has been charged off. This won’t happen until it’s past due by between three to six months. As each account is charged off, settlement negotiations will begin.

Stopping payments also helps establish that you have a legitimate financial hardship. If you keep struggling to make monthly payments, the creditors won’t take your claims of hardship seriously. In addition, they have no motivation to settle when they’re still getting payments – no matter how much you struggle to make those payments.

READ MORE: What does it mean when debt is charged off as bad credit

Instead, you will make a monthly deposit to the debt settlement company, which will be held in a bank account and used to pay any settlements that are reached.

When you stop making payments, late fees will accrue and debt collectors will call. Your credit score will fall. It’s important to remember that the damage to your credit score will be temporary. Once your debts are settled and the charge offs are removed from your credit reports, your credit score will bounce back. 

Is hiring a debt settlement company worth it?

Because a third-party debt settlement company acts as a middleman between you and your creditors, it will save you a lot of time and aggravation.

You’ll also save money by making one lower monthly payment, you won’t be dealing with the interest that accrues when you’re just making the minimum payment each month, and you’ll have a lower total amount of principal to repay, which will help you get out of debt quicker.

If your financial situation is leaving you stressed or in denial, taking this step will not only ease your worries but also help free up some extra time that can be spent relaxing or working on a side hustle that you enjoy.

Customized plan

First, the debt settlement company will review your information to determine whether debt settlement is your best option. If it isn’t, they will let you know.

Some companies also offer debt consolidation and will review your situation to determine which is best for you. Every consultation is different and will be explicitly customized around your debts.

A legitimate debt settlement company will also know which creditors are willing to consider settlements. Not all will, so if your debt is primarily with a creditor that doesn’t settle, you’ll know immediately. 

For example, some credit card companies only work directly with the borrower or through a nonprofit credit counseling agency. If most of your debt is with one of these lenders, debt settlement won’t be your best option.

Look for a company that seems professional and compassionate. You will need to be able to discuss all aspects of your financial situation, and it’s important that you feel comfortable with the people you choose to work with.

You approve the terms

No debts can be settled without your approval. You will not be obligated to accept the terms if you don’t like the offer. 

And if you decline an offer, you still don’t pay the debt settlement fees. You will not pay any fees until you have accepted a settlement.

Pro tip: Some settlements will repay the settlement over time, while others may be made in one lump-sum payment. This is why establishing your savings account is critical.

Why choose DebtHammer to settle your debts?

Once you contact us:

  • You will work directly with our team to find the best option for you.
  • We will assess the type of loans you have, whether you meet the qualification criteria and whether we can get results for you. If we don’t think you’re a good candidate for debt settlement, you will not pay a cent.
  • You will pay no upfront fees. You do not pay until we get results. And if your creditors refuse to settle, you won’t pay at all.
  • We will review your file and inform your creditors that they cannot harass you anymore.
  • You will be debt free in anywhere from one to five years, depending on the total debt you enroll.

You should also know:

  • We have an A rating from the Better Business Bureau and 4.8 of 5 stars on Trustpilot.
  • Our debt settlement program helps clients save an average of 30% of the total enrolled debts after fees.
  • We have IAPDA-certified debt specialists and offer access to legal help if problems arise with your case.
  • We have a top-notch team that prioritizes each and every client.
  • We are passionate about getting you out of debt.
  • You will get a free consultation when you complete this form.

Don’t worry (too much) about your credit score

Because you stop making monthly payments, debt settlement will initially hurt your credit score. The damage probably won’t be as bad as you think.

If you’ve already established a pattern of late or missed payments and are using most of your available credit, your score has probably already taken the biggest hit. 

Whether your score will drop much more depends on your credit score when you start the program. Clients with the highest credit scores will see the most significant declines.

For example, here is the estimated impact based on the FICO scoring model:

If your score is:

  • 730 could fall to 535
  • 630 could fall to 545
  • 505 could fall to 470

As you can see, the higher score drops almost 200 points, while the lowest score drops by just 35. 

How it affects your credit score will also depend on a few additional factors, including:

  • Your number of open accounts
  • Your credit utilization ratio
  • The payment status of other debts that aren’t enrolled in the program

READ MORE: When is debt settlement a good idea?

Pro tip: Many experts will tell you that debt settlement will hurt your credit score for seven years. This is incorrect. After settling your debts, the accounts will be marked as closed, and debts will appear as “settled” or “paid in full.” A “settled” notation doesn’t affect your credit score.  Once the charge off notations are replaced with a notice that the account has been settled, your credit score will rebound.

Risks vs. rewards of debt settlement services

A successful debt settlement program can have a lot of benefits, but there are a few risks you should be aware of.

Benefits include:

  • You don’t pay the full total of what you owe
  • Fewer worries about money
  • Repay your outstanding debts faster
  • Settlement agreements could prevent debt collection lawsuits
  • It could be your cheapest path to becoming debt-free
  • It is a better option than bankruptcy (in most instances)
  • It will stop annoying debt-collection calls
  • Any charge offs on your credit report will go away (this is the only way to remove legitimate charge offs)
  • It could improve your mental health

Drawbacks of debt settlement

  • Your creditors may not be willing to settle
  • Interest and late fees will add up while waiting for accounts to be charged off
  • Not all types of debt are eligible
  • You’ll have to deal with calls from debt collectors and collection agencies at first
  • It could take as long as four years to repay the settled debts
  • You may face income tax consequences

READ MORE: Debt settlement pros and cons

Pro tip: The Internal Revenue Service (IRS) could count any forgiven debt as taxable income, so you may need to consult a tax professional when tax time rolls around. However, there are often exceptions for people who can show financial insolvency.

Who qualifies?

Anyone with over $7,500 in unsecured debt — or $1,000 in payday loan debt — qualifies. It’s worth scheduling a free consultation to review options. 

There are a few other considerations:

  • You’re facing a legitimate financial hardship
  • You want to get out of debt once and for all
  • Your debts are primarily unsecured (credit cards, personal loans, medical bills and some student loans)
  • Your monthly budget can handle your monthly debt settlement payment (this would usually be the money you currently pay toward your unsecured debts
  • If you have credit card debts that have already been charged off or are more than 90 days past due, you already have a head start and would be an excellent candidate

If you meet these criteria, set up a free consultation now.

READ MORE: Debt settlement qualifications

Is debt settlement worth the cost?

It can be. A successful debt settlement plan can keep you from having to file for Chapter 7 bankruptcy, which will destroy your credit score for several years. 

Bankruptcy may sound ideal, but it can also be expensive. You’ll probably need a bankruptcy attorney, and you’ll need to pay for mandatory credit counseling courses and a handful of other expenses. Plus, if you don’t meet the qualifications for Chapter 7 bankruptcy (for example, pass the means test required for eligibility), you’ll have to file for Chapter 13 bankruptcy instead, and that reorganizes your debts rather than eliminates them.

Also, remember that debt settlement companies cannot charge anything until after the process is complete according to the Federal Trade Commission (FTC), and clients typically save 30% of the principal debt after paying the debt settlement fees.

READ MORE: Debt settlement fees

You don’t always have to pay for debt settlement

If you want to try your hand at debt settlement but don’t want to pay, you can call creditors on your own and start negotiations.

The settlement process is the same as it would be if you hired a debt settlement company. However, you will have to contact the creditors and handle debt negotiations and settlements independently.

For a successful negotiation, you’ll need to devote several hours per week to the process, including research and the actual negotiations. Plus you’ll have to have the discipline to ensure that you keep making deposits into a savings account so that you will have money accrued to pay any settlements.

If you’re a skilled negotiator with the time to spare, this may be an option to explore.

READ MORE: DIY debt settlement

Red flags: How to recognize debt settlement scams

Unfortunately, the debt settlement industry is full of scams, but there are a few ways to recognize scammers:

  • You get a call from a debt settlement company but never requested one
  • The caller won’t provide contact information for the company
  • They require upfront fees
  • They guarantee settlements
  • They make unrealistic promises, like lower interest rates, no credit score impact or instant results
  • They cite vague “government debt relief programs”
  • There is no Better Business Bureau presence (or a very negative one)
  • The company has a history of complaints online

When in doubt, contact the Consumer Financial Protection Bureau (CFPB) or another local consumer protection agency to find out whether complaints have been filed against the company. 

Search online to determine whether any lawsuits have been filed against the company.

READ MORE: Legitimate debt settlement programs

To learn more about debt relief scams, check out this video:

More debt relief options

  • Nonprofit credit counseling: A credit counselor will meet with you and set up a Debt Management Plan. However, these only work with credit card debt, you’ll repay the total amount you owe, plus you’ll have to pay a monthly administrative fee that ranges from $25 to $75.
  • Debt consolidation: You apply for a new personal loan, debt consolidation loan or a balance transfer credit card and use the new loan or line of credit to pay off your other debts. Some balance transfer cards will charge upfront fees, but you’ll pay no interest for a fixed amount of time — usually 12 to 18 months. Whether debt consolidation is a better option for you depends on your credit score, the total amount of money you owe and whether you’re in a position to afford the loan repayment. It’s also possible that you may not qualify for a new loan that’s large enough to cover all of your debts/
  • Bankruptcy: If your financial issues are extreme, Chapter 7 bankruptcy will give you a fresh start. However, it will remain on your credit report for 10 years, and you’ll have to have enough money to pay the out-of-pocket filing costs.

READ MORE: Debt settlement vs. debt management

The bottom line

Will debt settlement work for you? That’s a complicated question. However, if you have a large amount of unsecured debt, can’t afford your monthly payments and are struggling to make it from paycheck to paycheck, debt settlement can be an affordable way to get your finances back on track. 


How long will debt settlement stay on my credit report?

Once your debts have been settled, the account will be closed and the settlement notation will appear on your credit report. Though it will remain there for seven years, that notation will not impact your credit score.

Can I avoid paying income taxes on my debt settlement?

Yes, but you will have to prove insolvency. 
Insolvency means you owe more than your own (your total debts exceed your assets’ value. means your total liabilities exceed the value of your assets.
The IRS offers guidelines to calculate whether you’re insolvent.
If you can prove insolvency, you will be able to exclude some or all of your settled debts from taxable income. You should speak with a tax professional for more advice.

Can I repair my credit after debt settlement?

Yes, and you don’t need to hire an expensive credit repair company. Sign up for a free service like Experian Boost and use your standard monthly purchases — like your cell phone payment or Netflix subscription — to help rebuild your credit score. You can apply for a secured credit card and sign up for a credit-builder loan (Self offers a good one). Basically, between free services and making your payments on time, your credit score will slowly start to recover.

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