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How Debt Settlement Works: Is it worth it?

Looking for some help?

Need clarity around the debt settlement process?

You’re in the right place.

Debt relief or debt settlement is a valuable option available for those experiencing growing personal debt burdens or financial hardship.


It can seem confusing at first. That’s why in this article we aim to answer the question:

What debt settlement is and is it worth it?

What is debt settlement?

Debt settlement, also known as “debt relief”, is a personal finance strategy designed to help you save money by paying a reduced lump sum to creditors, rather than the entire amount you owe.

It can be a way out for people facing significant financial difficulty who lack the resources to fulfill their financial obligations yet wish to avoid bankruptcy.

How it works:

When individuals become delinquent on unsecured loans, it creates losses for the creditors. This motivates the creditors to find alternatives to regain some of that lost revenue such as openly negotiating reduced lump sum payments known as debt settlements with their customers. 

This strategy allows a consumer to pay a significantly discounted lump sum to fulfill their debt obligations to the creditor. 

The debt settlement story:

Here’s an example to explain the process using common parameters. 

The problem: 

Say hi to John Smith.

John owes $10,000 in credit card debt to ABC bank. He has missed 4 payments due to financial hardship doesn’t think he can maintain the minimum payments required.

ABC bank considers John’s debt as delinquent and doesn’t expect they will get their money back.

The debt settlement solution: 

John’s happy.

Instead of filing for bankruptcy or trying to avoid his financial obligations, John negotiated a deal with ABC bank. He offers to pay ABC bank a lump sum of $5,000 to settle his financial obligations.

Seeing as ABC bank believed John wasn’t going to pay them anything at all, they accepted his offer and reported his debt as paid on his credit report.

This way:

1. ABC bank has saved $5,000 ($10,000 loss – $5,000 regained), and:

2. John has saved $5,000. (A win-win for both parties, right?)

Keep in mind:

In real life, this process can take up to 48 months – mostly because of the time it would take John to save up the lump sum to offer his creditor.


…Without the professional experience and an existing relationship with the mitigation department, John would be unlikely to get the best deal (that’s where the professionals can help).

The Pro’s and Con’s of debt settlement.

Let’s look at both the pros and the cons of debt settlement, starting with the Pros.

The Pros:

The Cons:

There are lots of benefits to debt settlement. But, it’s not for everyone.

Overall, we have found that the people who tend to benefit the most from debt settlement are those who are already delinquent on their debts but not yet facing bankruptcy.

People in this situation tend to gain the greatest returns on their debt settlement cases.

Speaking of returns…

How much can I save with debt settlement?

How much you can save with debt settlement depends on a few factors such as:

The amount owed

Type of debt

The age of the debt

However, a May 2020 study by the Harvard Kennedy School found that:

The average savings achieved through the debt settlement process was $5,800  or $1,700 per debt. This is because the average person had multiple debts to settle.


Another study by the American Fair Credit Council cited a savings of 30% on your debt after all professional debt settlement fees. 

This same study states that consumers saved an average $2.7 dollars for every dollar spent with a debt settlement agency.

Want to see some of the past savings we have achieved for our clients? Check out our “Recent Settlements” page to see the real results achieved using the debt settlement. 


Quick tip: Debt settlement agencies don't charge upfront fees. They receive a commission percentage on how much they save you. If you don't save money, they don't get paid.

How does Debt settlement compare with other options?

Debt settlement is one of the multiple options available to those facing financial hardship. So how does it compare in savings, your long term financial health and overal debt reduction?

Let’s take a look:

Debt settlement vs Bankruptcy

These strategies both provide a solution for those facing financial hardship. 

However, both bankruptcy and debt settlement have particular advantages and disadvantages to consider.

Bankruptcy is often seen as a “reset” on your finances. However, you cannot really call it that. 

First of all, there is a long term impact on your credit score for either 7-10 years after filing for bankruptcy.


Even when bankrupt you may be expected to pay back at least a portion of your debts, and there are often legal consequences which can restrict your financial opportunities.

On the other hand…

…A debt settlement doesn’t require you to involve the courts and although it does impact your credit score, it generally won’t nearly do as much damage to your credit worthiness as declaring bankruptcy.

This is one of the benefits of debt settlement over bankruptcy. 

However with debt settlement you still need to pay your debts, albeit at a reduced rate.

When considering filing for bankruptcy, keep in mind that (depending on the State that you reside in) the courts may be able to take your home and possessions to satisfy part or all of your debts.

This does not happen with debt settlement.

Debt Settlement vs Debt Consolidation

Lot’s of clients ask us this:

What’s the difference between debt settlement and debt consolidation?

The short answer:

Debt consolidation provides you with a strategy to improve your credit report by flipping old, perhaps delinquent debts, into a new debt. 

The problem is:

For those experiencing financial hardship, debt consolidation does nothing to reduce your long term debt burden.

The goal of debt settlement is to significantly reduce your existing total debt burden with your creditors through a lump sum offering. 

It may not offer the same superficial benefits to your credit score that consolidation can, but it does create real changes to your financial burden.

Debt Settlement vs Debt Management

Debt management is when you negotiate more lenient terms while maintaining your current debt obligations, such as: lower minimum payments or a lower interest rate. 

This may create some month to month financial relief. 

However, because the actual principle debt does not decrease with debt management, this strategy only lowers your monthly payments. It does not reduce your long-term debt burden.

In fact:

It can keep you in debt for longer. 

Think about it: 

If you pay $100 towards a $10,000 debt every month, a simply calculation shows it would take you 100 months to pay this off.

Now let’s say you used debt management to negotiate $50 monthly payments instead. Great! You’ve just increased the time it will take to pay off your debt to 200 months.


Of course there are more factors to take into account. However, this is the basis of this strategy.

How to get started with Debt Settlement

Decided that debt settlement is the way to go?

As you can see, debt settlement is a valuable option for those facing financial hardship and looking to reduce their long-term debt burden.


It takes planning and strategy to get the best results. The more time you invest in the beginning, the more you stand to save at the end.

This is why we’ve created a great resource to walk you through the entire debt settlement process:

the “30 Steps to Debt Settlement: the Ultimate Guide pdf”.

If you’re the DIY type, this immense resource guides you through the entire process step by step.


Want a team of professionals who have literally done this 100’s of times to help you help get the best savings? 

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