Debt settlement means negotiating with a creditor to pay less than the full balance. It can reduce what you owe, but it carries risks, including credit damage, taxes and scams.
How it works
- You stop paying or fall behind, which often hurts your credit.
- You or a company negotiate a lump sum or payment plan for less than the full balance.
- You pay the agreed amount and the creditor reports the account as settled.
- Get the agreement in writing before paying.
Risks
- Late fees, interest and collection lawsuits while you save for a settlement.
- Credit score damage.
- Forgiven debt may be taxable income, with exceptions such as insolvency.
- Creditors do not have to agree.
Scam warning signs
Federal rules ban for-profit debt settlement companies from collecting fees before they actually settle a debt. Be wary of companies that promise guaranteed results, demand upfront fees or tell you to stop talking to creditors.
Alternatives
- Nonprofit credit counseling and a debt management plan.
- Negotiating directly with creditors.
- Hardship programs.
- Bankruptcy for overwhelming debt. See our bankruptcy guide.
Frequently asked questions
Should I settle on my own?
You can, and it saves fees. Always get terms in writing.
Will a settled account hurt my credit?
Yes, but less than unpaid defaults over time.