How Debt Settlement Can Save You Money- But Hurt You, Too

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

debt settlement

We’ve got your back! Student Loan Hero is a completely free website 100% focused on helping student loan borrowers get the answers they need. Read more

How do we make money? It’s actually pretty simple. If you choose to check out and become a customer of any of the loan providers featured on our site, we get compensated for sending you their way. This helps pay for our amazing staff of writers (many of which are paying back student loans of their own!).

Bottom line: We’re here for you. So please learn all you can, email us with any questions, and feel free to visit or not visit any of the loan providers on our site. Read less

An estimated 1.82 percent of credit card holders were delinquent on their debt in the fourth quarter of 2017, according to TransUnion. If you’re one of the cardholders struggling with bills, debt settlement could help with getting your financial situation under control.

Debt settlement involves negotiating with creditors to pay back less than you owe on outstanding debts. Third parties — such as debt settlement companies — often facilitate debt settlement and act as go-betweens and negotiate with creditors on your behalf, as the FTC explains. However, you don’t have to work with anyone for debt settlement negotiations. You can talk with creditors on your own and get a deal in writing to resolve an outstanding debt balance.

Whichever approach you choose, there are both pros and cons to settling your debt. Because of the downsides, this approach should often be considered a last resort — but it is an option to consider under the right circumstances.

What is debt settlement?

When you settle debt, you offer to pay less than the outstanding balance if the creditor will accept your payment as satisfaction of the debt.

A settlement agreement reached with a creditor may require you make a lump sum payment or negotiate a payment plan. For example, if you owe $1,000, you could offer a $600 payment if the creditor agrees not to try and collect the $400 remaining balance.

When you negotiate an agreement, base your offer on what you can afford. You could calculate this by determining how much money you could pay each month, or by determining how much money you have available to make a lump sum payment.

Creditors agree to debt settlement if they fear you won’t otherwise pay back what you owe — perhaps because of a bankruptcy filing — or if it would cost them too much to try to collect. Debtors benefit because collection efforts stop, interest and late fees no longer continue accruing, and creditors stop posting repeated negatives on their credit report.

When is debt settlement the right choice?

Debt settlement can be a good option under certain circumstances. “When it is done right it can save a lot of money,” said Robertson Cohen, a Colorado debt settlement and bankruptcy lawyer at Cohen & Cohen, P.C.

To decide if debt settlement is a good choice, the Consumer Financial Protection Bureau recommends first learning about the debt. If the debt is old, it may be outside the statute of limitations and no longer collectible. If you don’t believe you owe the debt, you can require the creditor to prove the balance due and the right to collect.

If you do owe and the statute of limitations has not run out, you’ll need to make sure settlement is affordable. Calculate the amount of discretionary income you have by subtracting monthly expenses from take-home pay, and providing a cushion for emergencies. If you have enough money left to make payments towards settling your debt and your creditor is willing to accept a proposed repayment plan during debt settlement negotiations, settling is a viable option.

As part of the terms of the settlement, the creditor should agree to stop collection efforts and forgive the remaining debt balance once you have completed the payment plan. CFPB advised that you get these promises in writing before you make a payment.

Advantages of debt settlement

Debt settlement could allow you to reduce the balance due on the outstanding debt dramatically. The Better Business Bureau indicates creditors may reduce outstanding balances by around 40 to 60 percent of what was owed. As this chart shows, the savings could be substantial, depending upon your outstanding debt balance.

Debt Balance Amount Saved if You Settle for 60% of Debt Balance Amount Saved if You Settle for 40% of Debt Balance
$5,000 $2,000 $3,000
$8,000 $3,200 $4,800
$10,000 $4,000 $6,000
$15,000 $6,000 $9,000
$20,000 $8,000 $12,000

Stopping efforts to collect is also beneficial, as you will no longer need to worry about collection calls, wage garnishment, or a creditor suing you in court for nonpayment of your debt.

Disadvantages of settling debt

There are some big downsides to debt settlement. “A few things come to mind right away,” Cohen said. “Tax consequences of forgiveness, damage to credit, shady outfits that disappear with your money, and the general uncertainty.”

Your credit score is inevitably damaged by debt settlement because, as Cohen explained, creditors have no incentive to settle when you’re current on your debt. “At minimum, you are going to have to go delinquent before they will even consider it.”

The impact of debt settlement on your credit score varies depending on where your score was before settling debt. According to MyFico, a debtor with a credit score of 780 would see a drop to around 655 to 675 after settling a credit card debt, while a debtor with a score of 680 would end up with a score of around 615 to 635 after settlement.

Some creditors are also unwilling to settle and will instead charge off debt and send you to collections — leaving you to work with the debt buyer. “Lates and charge-offs are not known for their credit score enhancing properties,” said Cohen.

The tax consequences of forgiveness could include a significant IRS bill, according to MarketWatch. Money saved by settling debt is treated as income. If a creditor forgives $500 worth of unpaid debt, you’ll owe the IRS income tax on the forgiven $500.

Shady outfits are another big problem in the debt collection industry. Cohen warned that just because a debt settlement company claims to be a nonprofit doesn’t guarantee it’s a good company. Many nonprofits make advanced deals with banks to reduce rates for delinquent borrowers who come to the nonprofit for help — but there’s fine print, like requirements to deposit payments into a bank account for years without missing a single payment, and few complete the program. Those who don’t complete the payment plan end up owing even more than they did when they started. Banks collect a lot of money from debtors under these “agreements” and make tax-deductible donations to nonprofits who facilitated the transaction. The nonprofits pay staff well, donating excess to charities to maintain their nonprofit status.

Finally, general uncertainty comes from the fact creditors sometimes “re-age” settled debt. “When it shows up on your credit a few years later with a similar but different balance, with a new account number, and a few collectors down the food chain, guess whose burden it is to prove that it was settled?” Cohen said. “It’s a huge hassle and it coincidentally usually hits right when you have rebuilt your credit. Most people just ‘settle’ again because it’s easier.”

What are some alternatives to debt settlement negotiations?

Settling debt is not the only way to resolve your debt problems. There are alternatives, including:

  • Refinancing debt. Refinancing debt changes the terms of your payment. You could refinance by taking a personal loan to pay off high credit card debt. Even taking a balance transfer on a credit card is a form of refinancing. Refinancing can make more sense if you can refinance to a new loan with a longer repayment period, a lower interest rate, or other terms that lower your payments to an affordable level.
  • Consolidating debt. Consolidating your debt using the right consolidation method also changes the terms of your payment. When you consolidate, you take out one big loan to repay several others. For example, you could take out one personal loan to repay five credit card balances. Consolidating can lower your monthly payment and make your debt more manageable.
  • Bankruptcy. While many view bankruptcy as a dire option, it may be better in certain circumstances than debt settlement. Cohen warned against taking drastic steps to settle debt, such as liquidating retirement funds or taking a home equity loan. Both retirement assets and home equity can be protected in bankruptcy, and you don’t want to convert unsecured debt that is dischargeable into secured debt that puts your home at risk.

What should you do?

Before you decide to settle debt, make sure you will be able to comply with the repayment terms. Cohen warns many people who opt for debt settlement actually cannot afford to complete repayment plans successfully. If you can’t pay what you agreed, you could end up wasting money trying to settle debt and then owing more when the agreement fails.

You should also consider if other alternatives are an affordable, viable solution for you. If you can qualify for a loan to consolidate or refinance debt and can afford the payments on the new loan, this is a much better option to protect your credit score.

Whatever you do, it’s key to make your choice with a focus on the big picture. “You have to look forward and ask yourself is this a long-term solution or just a temporary fix,” Cohen said. Creating a strategy to get all of your debt under control — and to stay debt free in the future — can give you peace of mind.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal Loans: Fixed rates from 6.990% APR to 14.865% APR (with AutoPay). Variable rates from 6.255% APR to 12.555% APR (with AutoPay). SoFi rate ranges are current as of September 1, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.255% APR assumes current index rate derived from the 1-month LIBOR of 2.08% plus 4.425% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

    To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.See Consumer Licenses.
  2. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  3. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  4. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (

2 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 4.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 4.99% APR loan, a borrower will need excellent credit on a loan of $15,000 with a term of 24 months, and qualify for at least two of the following discounts: (1) add a co-borrower who has sufficient income; (2) use at least fifty percent of the loan proceeds to directly pay off existing debt; or (3) show proof of having at least forty-thousand dollars in retirement savings – contact FreedomPlus for further details.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 15.49% APR to a high of 34.49% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.

†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at

**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.

7 Important Disclosures for Earnest.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.

** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

7.73% – 29.99%$1,000 - $50,000

Visit Upstart

6.26% – 14.87%1$5,000 - $100,000

Visit SoFi

6.99% – 35.97%*$1,000 - $50,000

Visit Upgrade

5.99% – 24.99%2$5,000 - $35,000

Visit Payoff

4.99% – 29.99%3$10,000 - $35,000

Visit FreedomPlus

5.99% – 18.99%4$5,000 - $50,000

Visit Citizens

15.49% – 34.49%5$2,000 - $25,000

Visit LendingPoint

6.95% – 35.89%6$1,000 - $40,000

Visit LendingClub

6.99% – 18.24%7$5,000 - $75,000

Visit Earnest

9.95% – 35.99%8$2,000 - $35,000

Visit Avant

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.