Ranges are industry-reported and vary a lot by company, creditor and how far behind you are.
How it works
- You stop paying the enrolled creditors and instead deposit a set amount each month into a dedicated savings account. That account should be in your name, held at an insured bank, and you should be able to withdraw your money at any time.
- As the balance grows, the company negotiates lump-sum payoffs with each creditor, usually starting with whichever account the money covers first.
- When you approve a settlement, the creditor is paid from your account and the company takes its fee for that debt.
- This repeats until every enrolled debt is settled, usually over two to four years.
What it really costs: a worked example
$25,000 of credit card debt enrolled. Each account settles for about 50% of the balance, and the fee is 20% of the enrolled debt.
| Item | Amount |
|---|---|
| Paid to creditors | $12,500 |
| Settlement company fees | $5,000 |
| Total you pay | $17,500 |
| Compared with the original $25,000 | about $7,500 less |
Not in that math: possible taxes on the forgiven $12,500, late fees and interest that pile up before each settlement, and the cost of the credit damage. Try your own numbers in the settlement estimator.
Who it can make sense for
- You owe roughly $7,500 or more in unsecured debt (credit cards, medical bills, personal loans, some private student loans).
- You're already behind, or you truly can't keep up with minimum payments.
- You can set aside a steady monthly amount for several years.
- You want to avoid bankruptcy, and you've checked that a nonprofit debt management plan won't work for your budget.
It doesn't work for mortgages, car loans, federal student loans, recent taxes or child support.
Upsides
- Often the lowest total dollars paid of any option short of bankruptcy
- One monthly deposit instead of many bills
- No fees allowed until a debt is actually settled
Downsides
- Serious credit damage, often for years
- Creditors can still sue you while you save
- Forgiven debt can be taxable
- Many people drop out before finishing
Rules that protect you
- No upfront fees. Under the FTC's Telemarketing Sales Rule, companies that sell debt relief by phone can't charge you until they've settled at least one debt, you've agreed to the settlement, and you've made at least one payment on it.
- Your money stays yours. The dedicated account should be in your name, you can withdraw at any time, and you get your money back (minus earned fees) if you quit.
- Some states add more. California requires registration, Texas and Florida cap certain fees, Illinois and Pennsylvania require licenses, and North Carolina bans for-profit debt adjusting almost entirely. See rules by state.
Red flags
- Any fee before a debt is settled.
- Guarantees of a specific savings percentage or that lawsuits won't happen.
- Telling you to stop talking to your creditors without explaining the risk.
- Pressure to sign today, or refusing to put fees in writing.
Check any company with the CFPB complaint database, your state attorney general, and the ACDR member list.
Common questions
How much does debt settlement cost?
Most debt settlement companies charge 15% to 25% of the debt you enroll. Under the FTC's Telemarketing Sales Rule they can't charge that fee until they have settled at least one of your debts and you have made at least one payment on that settlement.
Will debt settlement hurt my credit?
Yes. Settlement usually means you stop paying creditors while you save, so accounts fall behind and your score typically drops significantly. Settled accounts can stay on your report for up to 7 years from the original delinquency.
Is forgiven debt taxable?
Often. If a creditor forgives $600 or more, it may send you a Form 1099-C and the IRS can treat the forgiven amount as income. If you were insolvent when the debt was forgiven, you may be able to exclude some or all of it using IRS Form 982. A tax professional can help here.
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