Debt settlement is when you negotiate with a creditor to settle your debt, often for less than what you owe. If the creditor accepts the settlement, you’ll typically have to make a lump-sum payment to resolve the debt.

In some situations, settlement could be a helpful option to take control of your debt — such as if you are behind on payments or have a high balance that will be difficult to repay. However, there are other payoff strategies that might better suit your needs. In any case, it’s important to weigh the pros and cons of debt settlement so you can make the right choice for your situation.

Here are debt settlement pros and cons to keep in mind (along with other options to consider):

• Debt settlement pros and cons
• Debt settlement alternatives
• Debt settlement next steps

Debt settlement pros and cons

While debt settlement can be a good choice in some cases, it isn’t right for everyone. Here are some pros and cons to consider while weighing your options:

Benefits

• Might be able to settle for less than what you owe: A creditor could agree to a settlement that’s less than what you owe. They might also be willing to waive fees or interest charges.
• Pay off debt sooner: Settling a debt lets you pay off your balance all at once rather than spending months or years making payments — meaning you can quickly lessen the strain on your budget.
• Stop calls from collection agencies: If you successfully settle a debt, the calls from collection agencies should stop. Just keep in mind that it could take several months for the paperwork to be resolved before the calls will cease.
• Could help you avoid bankruptcy: Filing for bankruptcy can help borrowers who are overwhelmed by debt take control of the situation — however, bankruptcy will severely damage your credit, so it should be a last resort. Negotiating a settlement might provide you with the financial breathing room you need to avoid bankruptcy. It should also keep your creditors from suing you in an attempt to recoup their losses.

Disadvantages

• Creditors might not be willing to negotiate: There’s no guarantee that a creditor will accept a settlement offer.
• Could come with fees: For-profit debt settlement companies typically charge fees for their services — usually 20% to 25% of the final settlement amount.
• Could hurt your credit: Resolving a debt for less than what you actually owe could have a negative impact on your credit. Additionally, many debt settlement companies will encourage you to stop making payments while they attempt to negotiate with your creditor, which will further damage your credit.
• Debt written off might be taxable: If a creditor agrees to settle, the difference between what you owe and what you pay might be taxed as income.

Learn More: Credit Card Consolidation Loans

Debt settlement alternatives

Debt settlement can be a valuable option for taking control of debt — however, it also comes with several risks that aren’t always worth it for every situation.

The good news is that there are several other strategies that could help you pay off your debt more easily. If debt settlement doesn’t seem right for you, here are some alternatives to consider:

Get a balance transfer credit card

With a balance transfer credit card, you can move a credit card balance from one card to another. Some balance transfer cards come with a 0% APR introductory offer, which means you could avoid interest charges if you pay off your card before this period ends.

Apply for a debt consolidation loan

A debt consolidation Loan is a type of personal loan that you can use to pay off debts. This will leave you with just one loan and payment to manage.

If you decide to take out a personal loan to consolidate debt, be sure to consider as many lenders as possible to find the right loan for your situation. Credible makes this easy — you can compare your prequalified rates from our partner lenders in the table below in two minutes.