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Americans have more than $4 trillion in total consumer debt, not including mortgages, according to the Federal Reserve. If you have more debt than you can handle and no way to pay it in full, there are options.

Debt settlement offers a way to eliminate your debt by paying a fraction of what you owe. It’s not an ideal solution, but it’s available for consumers who have exhausted all other alternatives and want to avoid bankruptcy.

“Debt settlement is an option for consumers who can’t afford their current debt payments, and either can’t or won’t file for bankruptcy,” says Gerri Detweiler, credit expert and co-author of “Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.”

Debt settlement has significant risks and drawbacks. It should only be used as an option after you’ve thoroughly researched the process and considered whether the benefits outweigh the risks for your situation.

This guide offers information to help you decide whether debt settlement is a good choice for you. It allows you to explore alternatives and evaluate different debt settlement companies, and it has tips for avoiding problematic debt settlement practices.

The Best Debt Settlement Companies of 2020

U.S. News researched the leading debt settlement companies accredited by the International Association of Professional Debt Arbitrators or the American Fair Credit Council. Each company was evaluated based on key factors, including program time frame, types of debt settled, minimum debt requirements, fees and customer satisfaction.

There is no debt settlement company that is perfect for everyone, so recommendations are based on the top performers with strengths in key areas. These recommendations are meant to aid in your research by showing you the company most likely to meet your needs. While these recommendations offer a starting point, you should thoroughly research each company to determine whether it’s a good fit.

U.S. News evaluated 30 of the top debt settlement companies using 11 important measures, including service offerings, fees, accreditation, transparency and customer satisfaction. Recommendations are based on the companies that performed the best in those measures.

Best lender for settlement of some secured debts.

Established in 2009, National Debt Relief offers debt settlement services and financial education for consumers. National Debt Relief settles secured debt under certain circumstances. Unsecured debt, including private student loans, may be settled as well.

Highlights:

  • Types of debt settled: Unsecured debt, including private student loans, and secured debt under certain circumstances
  • Program length: Two to four years, but can vary
  • Minimum debt settled: $7,500
  • Minimum per account: $500
  • Fee: 15% to 25%
  • Accreditations: AFCC and IAPDA
  • BBB rating: A+

Best Features

  • You can join the program through a simple phone enrollment.

  • At least $7,500 in debt is required to enroll.

See full profile

Best lender for personal account managers.

Pacific Debt Inc. was founded in 2002 to help consumers settle outstanding debt. The company charges a 15 to 25 percent fee on the reduced debt for the majority of its clients.

Highlights:

  • Types of debt settled: High interest credit card, unsecured
  • Program length: 24 – 48 months, in some cases programs may be extended
  • Minimum debt settled: $8,000
  • Minimum per account: $500
  • Fee: ees vary by debt amount and state, 15-25% of the original balance
  • Accreditations: IAPDA, AFCC
  • BBB rating: A+

Best Features

  • Enroll a wide variety of unsecured debts.

  • Debts are typically resolved in 24 to 48 months.

See full profile

Best lender for all types of unsecured debt.

Accredited Debt Relief is an accredited debt settlement company based in San Diego. Established in 2009, the company has enrolled more than 85,000 clients to date.

Highlights:

  • Types of debt settled: All types of unsecured debts including credit cards, personal loans, payday loans, medical bills, collections, private student loans and repossessions.
  • Program length: 12 to 60 months depending on debt amount and affordability
  • Minimum debt settled: $7,500
  • Minimum per account: $450
  • Fee: 14%
  • Accreditations: IAPDA, AFCC
  • BBB rating: A+

Best Features

  • A wide variety of unsecured debts can be enrolled.

  • Debts are typically resolved in 12 to 60 months.

See full profile

Best lender for high interest credit card debt.

Founded in 2003, DMB Financial works with consumers to control and restructure their debt. The company specializes in settling high-interest credit cards and other unsecured debt.

Highlights:

  • Types of debt settled: High-interest credit cards, unsecured debt
  • Program length: 36 to 48 months
  • Minimum debt settled: $10,000 and at least two credit cards
  • Minimum per account: Not disclosed
  • Fee: Not disclosed
  • Accreditations: IAPDA, AFCC
  • BBB rating: A+

Best Features

  • Only unsecured debts are eligible.

  • Debts are typically resolved in 36 to 48 months.

See full profile

What Do Debt Settlement Companies Do?

When you settle a debt, your creditor agrees to accept less than what you owe to resolve it. Debt settlement typically becomes an option long after you’ve defaulted on your credit card debts. If you’ve continued to pay your bills, creditors are not likely to be interested in settling your debt. However, if they believe that they’re in danger of not receiving any repayment, they may be willing to reduce the amount you owe and settle for less.

For-profit companies typically offer debt settlement programs. When you enroll, you will be advised to stop paying all your credit card bills and instead place the money in a dedicated account, where the funds will accumulate. When the balance is large enough, the debt settlement company will begin to negotiate with the credit card issuer to accept these funds as a settlement. This process can be effective yet problematic.

“Unfortunately, you can’t have it both ways: You can’t settle debts for less than what you owe and avoid damage to your credit,” Detweiler advises. “You have to decide what’s most important to your financial health: protecting your credit or getting out of debt. In many cases, getting out of debt is the more important goal in the short term.”

However, stopping payments on your credit cards may not be a wise strategy. John Ulzheimer, a credit expert who formerly worked with FICO and Equifax, says, “It’s never a good idea to skip your payments – ever. I recognize this is a common strategy suggested by the debt settlement companies, but this can lead to negative credit reporting and collection lawsuits.”

There are few advantages and many disadvantages to debt settlement.

  • You may ultimately pay less than what you owe. The unpaid balance is forgiven once the negotiated sum is paid in full.
  • Debt settlement may offer a more budget-friendly plan for getting out of debt within two to five years. However, settlement is not guaranteed.
  • Debt settlement is an alternative to bankruptcy.

  • Companies may encourage you to skip payments so your creditors will be more likely to settle. The process could take months or years. During that time, you’ll continue to receive calls and letters from collection agencies, and you will accumulate late fees, penalty interest and other charges. Also, your credit score will plummet, and you could face lawsuits from your creditors.
  • The cost of the late fees, interest and other penalties assessed may be more than the amount you can reduce your debt with a settlement.
  • There’s no guarantee that debt settlement will work. Creditors may refuse to work with your debt settlement company or reject negotiation offers. If the creditor won’t settle, you’ll be in a worse situation than when you started.
  • In addition to credit damage from the months, or potentially years, of missed payments during negotiation, settling can leave a harmful mark on your credit. The higher your credit score is to start with, the more it will drop. When you settle, the account may remain on your credit report with a notation that it was settled for less than the full amount.
  • The amount of the balance that’s forgiven may be considered income, which you’ll have to pay taxes on unless you’re insolvent, or the settlement is part of a bankruptcy or foreclosure.

What Are the Costs of Debt Settlement?

Debt settlement companies either charge a percentage of your total debt or the debt settled.

If they charge based on settled debt, you pay a percentage of the debt that was eliminated. Most debt settlement companies charge a 15% to 25% fee on the reduced debt amount. For example, if your company eliminates $10,000 of your debt and charges a 25% fee, you’ll pay $2,500.

Some debt settlement companies require customers to set aside money in a dedicated account for payment to creditors. This account is managed by a third party and will typically require fees.

In addition to the fees you’ll pay to your debt settlement company, you will also have to pay taxes on your settled debt. This can minimize the savings of a settlement offer.

How Does Debt Settlement Affect Your Credit History?

Debt settlement typically has a negative effect on your credit history, both during the settlement process and once the debt is settled.

The three major credit bureaus – Equifax, Experian and TransUnion – calculate your FICO score from credit data in multiple categories with different weights of importance:

  • Payment history is 35%
  • Amounts owed is 30%
  • Length of credit history is 15%
  • New credit is 10%
  • Credit mix is 10%

Payment history and amounts owed account for 65% of your credit score. If your debt settlement agreement requires you to stop making payments to creditors, both payment history and amounts owed will be negatively affected.

When you pay off the full balance of an account, it will be reported to the credit bureau as paid in full. This is not the case with debt settlement.

“Settlements are considered to be major [derogatories] in both FICO and VantageScore’s scoring systems,” Ulzheimer says. “As such, they can certainly result in lower scores.”

When you settle for less than the full amount, the account will be reported as settled and indicate that you did not pay the full amount. Accounts settled for less than the full amount reflect negatively on your credit history. Settled accounts can remain on your credit report for up to seven years from the original delinquency date or the date reported as settled if the account was not in collections.

“Settled debts are not removed simply because they’ve been settled,” Ulzheimer says.

How Can You Choose the Best Debt Settlement Company?

When choosing a debt settlement company, focus on five key areas:

  • Requirements
  • Fees
  • Accreditation
  • Transparency
  • Customer satisfaction

Some debt settlement companies may not be able to settle the type or amount of debt you have. When considering a company’s requirements, look for:

  • Types of debt settled
  • Minimum required debt
  • Minimum debt per account

Some debt settlement companies will only deal with certain types of unsecured debt, such as credit card debt. Many do not offer services for student debt, and if they do, it is only for private student loans, not federal student loans. Make sure the debt settlement firm you choose deals with the type of debt you’re concerned about.

Companies typically have minimum amounts of debt that they will negotiate, and some have minimum amounts required per account.

For example, a company may require that you have at least $7,500 in debt, with a minimum debt of $500 per account. In that case, if you have $10,000 in debt on credit card A and $300 on credit card B, the company would only negotiate credit card A, even though your total debt of $10,300 exceeds its minimum requirement.

Look for a company that charges the lowest fee percentage. However, keep in mind that some companies charge a percentage on your total debt, while others charge based on the total debt reduced.

Debt settlement companies should be accredited. Verify that a company is accredited by the American Fair Credit Council or the International Association of Professional Debt Arbitrators. These organizations require members to meet certain standards of practice and operational compliance designed to ensure protection for consumers.

Unscrupulous debt settlement companies may make big promises, such as suggesting that debt settlement won’t hurt your credit score, or that they can keep debt collectors from calling you or lenders from suing you. The reality is debt settlement can’t protect you from credit score damage, debt collectors or lawsuits, and a good debt settlement company will be transparent about these facts. It’s a good idea to check each debt settlement company’s website for disclosures on the effects of debt settlement on your credit score.

Customer experiences can tell you a lot about what you can expect from a debt settlement company. Research online reviews with Trustpilot, which rates companies based on aggregate customer reviews, and the Better Business Bureau.

What Red Flags Should You Look for While Evaluating Debt Settlement Companies?

There are no guarantees when it comes to debt settlement. Be wary of any company that promises otherwise. The Federal Trade Commission recommends avoiding companies that:

  • Charge fees before settling your debts
  • Say they can settle all your debt
  • Tout a “new government program” to bail out personal credit card debt: There is no such thing
  • Guarantee they can make your unsecured debt go away
  • Tell you to stop communicating with your creditors without explaining the consequences
  • Tell you they can stop all debt collection calls and lawsuits
  • Guarantee your unsecured debts can be paid off for pennies on the dollar

“Be very leery about debt settlement companies that make settlement seem like a sure thing or that charge high upfront fees,” Detweiler says. “There’s no guarantee that every one of your creditors will settle, and a settlement company should be realistic about your prospects based on your individual creditors.”

What Alternatives To Debt Settlement Are Available?

Because of its significant risks and drawbacks, debt settlement is not a good option for all consumers. Alternatives such as debt management, debt consolidation and direct negotiation may be better choices for some.

Ulzheimer encourages consumers with debt to work out a debt management program with a nonprofit financial counselor. With a debt management program, a certified credit counselor will help you create a plan for paying off your debt using a realistic budget. Debt management programs typically involve a setup fee and a small monthly fee, one-on-one help from a credit counselor, and a plan to repay your debt within three to five years.

This type of program does not have many of the drawbacks of debt settlement, as you will continue to make payments and pay your accounts in full. The effect to your credit history is far less severe, as you’ll be paying your debts as agreed. The counselor may work with your creditors to reduce your interest rates, which can help you reduce the amount paid on your debt without a settlement.

Debt management plans are often a better choice than debt settlement for consumers facing overwhelming debt. It’s a good idea to try a debt management plan before resorting to debt settlement, unless the monthly payment is truly unaffordable.

With debt consolidation, you can take out a loan to combine multiple debts into a single payment, ideally with lower interest. This can be a more manageable option than trying to pay off multiple high-interest accounts.

Debt consolidation is typically a more responsible solution for reducing debt than debt settlement. If you consolidate debt and complete payments with a debt consolidation loan, your accounts will be reflected as paid in full. This is better for your credit rating than settling accounts. However, unlike debt settlement, debt consolidation requires that you pay the full amount of your debt over time.

You don’t have to work with a debt settlement company to negotiate settlement agreements. You can talk to lenders directly to explain your situation and ask to settle your account for less than the full amount.

“There’s nothing a debt settlement company can do for you that you can’t do for yourself,” Ulzheimer says. “If you’re having a hard time making your payments, then talk to your lender. They’d rather work with you than with a third-party settlement company.”

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