Debt settlement helps you reduce debt by paying a fraction of your total balance. Learn more about how it works, its impact on your credit score, and its risks.
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The number of Americans having a hard time keeping up with debt payments is increasing, according to a 2023 report by the Federal Reserve Bank of New York. 1 Moreover, the trend appears to be growing faster for those in their 20s: the same report found that nearly 9% of credit card balances for people aged 18-29 were seriously delinquent (90+ days) as of the first quarter of 2023. 1 This trend can be particularly troubling for young people, since credit score damage from delinquencies can make it harder to take out mortgages or other loans in the future. But there are many ways young Americans can start managing their debt. One option is debt settlement—though it comes with risks.
Debt settlement is a debt reduction method in which the credit issuer allows a person to pay off their debt for less than the original balance owed, typically in the form of a lump-sum. 2,3 How much a creditor will settle for depends on several factors, including your overall balance and financial situation. But a creditor won’t likely accept a debt settlement if they believe you could pay the full amount—otherwise, why would they settle for less? In other words, a creditor is only likely to approve a debt settlement proposal if they fear you may not be able to pay the balance at all.3 3,4
A debt settlement or debt relief company will attempt to negotiate with your creditors to accept a lump-sum payment for less than your original balance. To build that lump sum, you’ll probably have to make monthly deposits into a savings account held by the debt settlement company. Meanwhile, they’ll likely advise you to stop paying your creditors to improve the chance of your settlement being approved—a high-risk move that could have negative consequences. Debt settlement companies might seem like the easy way out, but experts say they’re not always a good idea. According to the U.S. Consumer Financial Protection Bureau (CFPB), debt settlement programs are notorious for offering unsound financial advice, being expensive, and risky. 4 What’s more, the Federal Trade Commission (FTC) says many consumers drop out of debt settlement programs without settling their debts. 5 For more information about debt settlement companies, see “Are Debt Relief Programs Too Good to Be True?” Arranging a do-it-yourself debt settlement with a creditor might take a little bit more time and effort, but it’s also less risky and you won’t have to pay for someone else’s services—and that savings can make a big difference if you’re deep in debt. But still, there’s no guarantee that your debt settlement will be approved. If all else fails, you can try to arrange a modified payment plan to reduce your monthly payments.