Debt settlement is when a creditor agrees to accept less than the full amount owed from a debtor, often as a lump-sum payment or a short-term payment plan.

It’s generally for unsecured debt like credit cards, personal loans, or medical bills— not for secured debts like car loans or mortgages.

Most settlements are completed in 24–48 months.

You’ll typically make monthly deposits into a dedicated account. Once there’s enough saved, the settlement company negotiates with creditors to pay off each debt.

You can settle debt yourself or hire a company to negotiate for you. In either case, the idea is to offer a partial payment in exchange for forgiveness of the remaining balance.

Many companies advise you to stop paying your creditors to prompt a negotiation. This can hurt your credit in the short term, and creditors aren’t obligated to accept a settlement offer.

Creditors may accept a reduced amount—but it’s not guaranteed.

Some companies prioritize settling smaller debts first. Be sure to ask how your accounts will be prioritized so you don’t rack up avoidable interest elsewhere.

» RELATED: Debt snowball vs. debt avalanche

Expect to pay 15% to 25% of the enrolled debt. You may also face penalties and late fees from creditors during the negotiation period—especially if you’ve paused payments.

Settle $20,000 for $10,000? You’ll likely owe $3,000–$5,000 in fees.

Look for companies with clear pricing and no fees until a settlement is reached. Avoid those asking for large upfront payments. Here’s what else to consider:

1. Check credentials: Are they accredited by groups like the AADR or IAPDA? Are they licensed in your state?
2. Read reviews: Use platforms like SimplyDebtSmart and the CFPB complaint database to look for red flags.
3. Watch for false promises: No company can guarantee debt elimination or protection from lawsuits.

While debt settlement can reduce your overall balance, it also has real downsides—especially to your credit.

Forgiven debt is usually reported as a charge-off and can be taxed. Always get your settlement in writing, and understand what you’re agreeing to.

Pros

May reduce total debt owed

Can help avoid bankruptcy

No need to deal directly with creditors

One monthly payment

Cons

Credit score will drop

Takes 2–4 years to complete

Not guaranteed to work

Fees can be high

The National Foundation for Credit Counseling suggests several options that may be better suited for your situation:

1. Negotiate yourself: Reach out to creditors to request a hardship plan or reduced payoff.
2. Hire a lawyer: A debt attorney can negotiate settlements and shield you from direct contact with lenders.
3. Bankruptcy: A last resort that wipes out many debts—but damages your credit for years.
4. Debt consolidation: A personal loan or balance transfer card may offer a lower interest rate to manage existing debts.

» MORE: Debt consolidation vs. settlement

The SimplyDebtSmart research team ranked providers using a custom scoring system based on customer reviews and company offerings. We analyzed thousands of reviews from Dec 2021 to Nov 2024.

1. Customer service quality
2. Process transparency
3. Staff professionalism

We also reviewed the most important service factors: minimum debt amounts, average settlement time, and availability across states.

Companies with the highest scores received a “Best for” or “Our Pick” label based on category strength.