Do Debt Settlement Programs Work?

Written By Mary Beth Eastman
Last updated January 16, 2020

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Personal Finance
July 8, 2019

Simple. Thrifty. Living.

If you’re drowning in debt, it’s tempting to participate in a debt settlement program to help alleviate your debt burden. Debt settlement is often for individuals who are unable to afford to pay their current debt and for those who want to avoid bankruptcy but have used up all their options to pay back their debt. But do debt settlement programs actually work? It’s worth assessing the advantages and disadvantages of debt settlement programs to determine if they work for you. Here’s what you should know:

The debt settlement company pays a lump sum amount to your creditor to settle your debt. Sometimes this amount is far less than the full amount you owe. However, the creditor must first accept the offer.

Debt settlement programs may offer some benefits. For instance, you can get your debt discounted. That’s because debt settlement companies negotiate with your creditor to help you resolve your debt for an amount that is less than what you originally owed. Also, you can stop receiving collection calls and letters from your creditor when your debt settles.

Debt settlement programs aren’t always ideal. Some cons of participating in debt settlement programs include:

  • Settlements are often expensive. You can expect to pay fees for using a debt settlement company. These fees are typically a percentage of your settlement. You can also still owe the debt if the lender refuses the settlement.
  • You may owe tax. Creditors must file a form to the Internal Revenue Service (IRS) to inform them of their loss due to the debt settlement. The IRS views your forgiven debt as taxable income. Thus, you may be responsible for paying taxes on the forgiven amount of your debt.
  • Settlements can take long. It can take as much as three years to settle your debt. Also, debt settlements can stay on your credit for seven years.
  • You risk ruining your credit. You’ll need to stop making payments before you can qualify for debt settlement programs. That means late payments, late fees, and a slew of collection calls. However, missed payments can negatively impact your credit score. Also, when the debt settles, it can lower your score even more.

If you’re considering a debt settlement program to resolve your debt, it’s important to take into account the pros and cons. Also, review your financial situation and your ability to pay back your debt. If you decide that participating in a debt settlement program is ideal for you, read the fine print and choose a reliable debt settlement company that has a good reputation and customer support. Check out our National Debt Relief review to find out how it compares to companies like Freedom Debt Relief.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

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