Debt settlement companies attempt to force your creditors to accept less than what you own. In some cases, creditors might feel that accepting 50% of the balance in cash is better than the risk of their customer potentially filing for bankruptcy, in which case the creditor often gets nothing.
Debt settlement comes with significant downsides: the low likelihood of success, the high likelihood for extensive fees, the possibility of being sued by your creditors, and the certainty of long-term damage to your credit rating.
Pros
- When it works, you end up paying only a portion of your original debt balance.
Cons
- Difficult and time-consuming if you do it yourself
- Account reported as “charged off” or settled for 7 years
- Added fees and demands if using a third-party, including:
- $10,000 minimum of debt
- 15% and 25% fee (based on written-off debt)
- Risk of a lawsuit by the creditor
- Possible tax on written-off amount income
