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Debt settlement — the honest pros and cons.
Debt settlement can reduce what you owe by 40-50% on average — but it damages your credit, may trigger taxable income, and only works for certain types of unsecured debt. Here's the unvarnished picture before you enroll.
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FAQs
Debt relief — what people ask
How does debt settlement actually work?
You stop paying creditors and instead deposit money monthly into an escrow account managed by the settlement company. When the account is large enough, the company negotiates a lump-sum payoff with each creditor for less than the full balance. The settlement company takes a fee from the settled amount.
How does settlement affect my credit?
Significantly — typically a 100-150 point drop. Late payments are reported during the 24-48 month program, and settled accounts show as 'settled for less than full balance' for 7 years.
Is forgiven debt taxable?
Generally yes. Any forgiven debt over $600 is reported on a 1099-C and counts as ordinary income on your federal return. There are insolvency exceptions if your liabilities exceeded assets at the time of settlement.
How long does a settlement program take?
Most programs run 24-48 months. You can leave at any time, but you've already damaged your credit and may owe partial fees on any settlements completed.
Which debts can be settled?
Unsecured debts: credit cards, medical bills, personal loans, some private student loans. Secured debts (mortgage, auto loans) and federal student loans cannot be settled this way.