Deciding to settle your debt for less than you owe is a big decision. While it can help you get out of debt for less than you owe, you must weigh the advantages of that versus the downside of the credit damage you’ll likely face. This guide can help you compare debt settlement pros and cons, so you can make an informed decision on the best way to get out of debt for your situation.

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Debt settlement pros and cons compared side-by-side

Pros of SettlementCons of Settlement
Debt settlement is usually the fastest way to get out of significant debt without filing for Chapter 7 bankruptcy.Each debt you settle may result in a negative item in your credit report that will stick around for seven years.
Settlement is also usually the cheapest option since the average person pays just 48% of what they owe.In most cases, debt settlement will result in at least some credit score damage.
You can avoid the fees and hassle of filing for bankruptcy.The settlement industry is filled with unscrupulous companies, so it’s possible to get scammed.

Breaking down the benefits of debt settlement

Unless you file for Chapter 7 bankruptcy, which can take as little as six months to complete, debt settlement is typically the fastest way to get out of credit card debt. Debt settlement programs can be completed in as little as 12 months, depending on your financial situation. Even if you have limited funds for generating settlement offers, a good debt settlement company may be able to help you set up a plan that would have you out of debt less than 48 months. That’s equal to the average term you’d face with a debt consolidation loan, and you’ll likely eliminate your debt for half the cost!

Cost savings is the other big advantage of debt settlement. While other debt relief solutions focus on reducing the interest rate applied to your debt, debt settlement makes APR a complete non-issue. With debt settlement, you only pay back a percentage of principal – that’s the actual debt you owe. Interest charges and penalties don’t even factor into the final settlement.

If you’re looking for the fastest, cheapest exit possible without the expense of bankruptcy, settlement may be the best choice. Keep in mind that bankruptcy isn’t free. The filing fee for Chapter 7 is $335, then you’ll also have fees for your attorney. This is why it’s important to have the right filing expectations before you take your case to the courts.

Overcoming the cons of debt settlement

Most of the disadvantages of debt settlement have to do with the potential damage it can do to your credit. These are all the ways that debt settlement could affect you:

  • Unless you take steps to prevent it, each debt you settle with result in a negative credit report item.
    • This sticks around for seven years from the date of first delinquency if it’s still with the original creditor
    • If it’s a collection account it’s seven years from the date of final discharge.
    • The date will be listed as “settled in full” instead of “paid in full”
  • Any missed payments leading up to debt settlement may also negatively affect your credit history.
  • All of this may negatively affect your credit score.

According to The Balance, settling one credit card would drag down your score by 45-65 points for a 680 FICO. It would affect your score even worse if you started with a 780 FICO score. Then you might see your score drop by as much as 160 points.[1]

However, the credit score damage caused by debt settlement may not be nearly as dramatic as what you might expect. In fact, there are a few ways that you can negotiate to potentially minimize the credit damage caused by settlement.


If your account is still with the original creditor, then you may be able to ask them to re-age the account in exchange for payment. The creditor basically agrees to adjust the credit history on the account to remove any missed payment notifications. Removing these missed payments will help alleviate some of the credit damage caused by your financial hardship.

Pay for delete

If you are settling a collection account,  you can negotiate to remove the collection account from your credit report. You basically agree to pay back a certain percentage of the balance owed and in exchange, the collection agency agrees to remove the account from your credit report.

Negotiating a favorable outcome for your credit during debt settlement

Minimizing the potential damage to your credit score when negotiating a settlement takes skill. But it’s possible to avoid at least some of the negative information in your credit report that settlement can cause. In some cases, you may need to agree to paying your creditors a higher percentage of the balance owed in order to get more favorable terms for your credit.

Even if you do end up with some credit score damage, the effects may not be quite as drastic as you think. Any negative items will remain on your credit report for seven years. However, the “weight” of those penalties on your credit scores will decrease over time. In other words, the effect of a debt settled last year will be more significant that one settled five years ago.

Comparing debt settlement pros and cons to other solutions

As you’re working to get out of debt, it’s important to weigh the pros and cons of various solutions you may decide to use. This table can help you understand how debt settlement compares to other solutions.

Balance TransferConsolidation LoanDebt Management ProgramDebt SettlementBankruptcy
APR0% APR for 6-18 months, based on your credit scoreLow fixed interest rates, currently averaging 13%Negotiated to between 0-11%, on averagen/an/a
Monthly paymentAs high as possible to eliminate your debt during 0% APR periodMay be lower than your total payments nowTotal credit card payments reduced up to 30-50%May require monthly set aside; amount based on your budgetChapter 13 we create a court-ordered repayment plan
Credit required to useExcellentGoodAnyAnyn/a
Debt amountLess than $5,000Up to $25,000$5,000-$100,000+$5,000-$100,000+Any
Credit score effectPositivePositiveNeutral or positiveNegative, but subject to negotiationNegative, up to 10 years for Chapter 7
FeesBalance transfer fees up to 3% of each balance transferredLoan origination fees, typically up to 1% of amount borrowedRegulated by state, up to $69 per monthTypically, a percentage of the original amount settled$335 for filing fee for Chapter 7, $310 for Chapter 13; attorney fees
Time to become debt free6-18 payments24-48 payments36-60 payments12-48 payments6-12 months for Chapter 7, 3-5 years for Chapter 13

What about consumer credit counseling services?

If you’re looking for debt relief, you might have heard of consumer credit counseling services. This is not a solution, in and of itself. Nonprofit credit counseling is simply meant to provide a free, unbiased debt evaluation to help you find the best option for relief. A good credit counseling agency won’t drive you into a single solution. Instead, they’ll recommend the best solution based on your needs and budget.

In theory, a credit counselor may recommend debt settlement if it’s the best option for your unique financial situation. A credit counselor should never try to push you into a debt management program, even though that’s the solution that a credit counseling agency provides. Just make sure that the credit counselor that you’re talking to works for a nonprofit agency. Otherwise, they may promote their own debt management program instead of giving on an unbiased opinion the best solution for you to use to get out of debt.

Getting out of debt shouldn’t take guesswork. Talk to a certified debt relief expert for a free evaluation.

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Article last modified on March 19, 2020. Published by, LLC