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What Is Debt Settlement?

When unmanageable debt has you in a bear hug, you’ll probably do anything to wriggle free — including striking a deal with your creditors to reduce how much you have to pay. Debt settlement involves negotiating with your creditors to reduce the amount you owe, often with the help of a third-party company. 

Having someone lighten the burden of your debt sounds like a great deal, and in some cases it’s the smart move. But debt settlement can be a lengthy, stressful process that sometimes ends in regret. CNBC Select explains what you should know about debt settlement and how to decide if it’s right for your situation.

What you should know about debt settlement

How debt settlement works

When you settle a debt, your creditor agrees to accept less than your remaining balance. Why would the creditor agree to this? Because they make the calculation that it’s better to get some of the money you owe them rather than hold out for the full amount which you can’t (or won’t?) pay.

You can try to reach an agreement yourself by talking to your creditor, and they can potentially reduce the amount you owe or change the terms of your debt to make it more manageable. 

But as you might suspect, creditors typically don’t want to settle for anything less than the full amount, so the negotiation process is almost always tough. Many people choose to hire a debt settlement company and have them do the work instead. In most cases, the company will instruct you to stop making any payments on your debt and to put that money in a savings account instead. The settlement company will use these funds to collect its fee and pay your debt if they’re able to resolve it with your creditors. The process typically takes three to four years.

Note that debt settlement companies can only legally charge you fees once they have resolved your debt — and that’s far from guaranteed. That’s why if a company requests you pay beforehand, you’re most likely dealing with a scammer. Always research a debt settlement provider before hiring them to make sure you’re working with reputable professionals. 

CNBC Select analyzed multiple debt relief companies and recommends New Era Debt Solutions as our top pick. The company has more affordable fees than its competitors and has been in the industry for over two decades. It also ranks highly for customer satisfaction.

New Era Debt Solutions

  • Cost

    14% to 23% of enrolled original debt

  • Highlights

    New Era Debt Solutions has slightly lower fees than some of the other debt relief services we rated. It’s been in business for 22 years, and is rated 4.93 out of 5 for customer satisfaction through the Better Business Bureau.

  • App available

Pacific Debt Relief is another provider with highly-rated customer service and has been in business since 2002. Note, however, that it only works with clients with $10,000 or more in unsecured debt.

Pacific Debt Relief

  • Cost

    15% to 25% of enrolled debt

  • Highlights

    Pacific Debt Relief is highly rated for customer service, earning a 4.93 out of 5 according to the Better Business Bureau. Since 2002, the company has settled over $300,000,000 worth of debt.

  • App available

Pros and cons of debt settlement

At first glance, debt settlement may appear like an excellent solution. In reality, debt relief is a valid tool for some — but for most, it should be a last-resort option.

Here’s what to consider before settling your debt.


  • You can reduce your debt. Negotiations can lead to different types of resolution, but essentially, you’ll pay less than what you owe. That’s undeniably the main draw of debt settlement.
  • You can have a professional handling negotiations for you. Trying to settle a debt yourself can be time-consuming and overwhelming. The option to work with a third-party company can save you the headache and offer some peace of mind.


As you can see, you’re potentially making a bad situation worse by opting for debt settlement. For that reason, you should first exhaust all of your other options before turning to settlement.

Solutions to consider before settling your debt

Citi® Diamond Preferred® Card

  • Rewards

  • Welcome bonus

  • Annual fee

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

  • Credit needed

A personal loan comes with a fixed interest rate and consistent monthly payments, which gives you a predictable payment schedule. And with a debt consolidation loan, the lender will often directly pay your creditors without you having to get involved.

Many lenders charge origination fees that generally range from 1% to 10%. That said, it’s possible to find lenders that waive them, such as LightStream — our top pick for those with good or excellent credit. Unfortunately, LightStream won’t pay your creditors directly — but you can get the funds to do so yourself as soon as the day you apply.

LightStream Personal Loans

  • Annual Percentage Rate (APR)

    7.99% – 25.99%* APR with AutoPay

  • Loan purpose

    Debt consolidation, home improvement, auto financing, medical expenses, and others

  • Loan amounts

  • Terms

    24 to 144 months* dependent on loan purpose

  • Credit needed

  • Origination fee

  • Early payoff penalty

  • Late fee

Terms apply. *AutoPay discount is only available prior to loan funding. Rates without AutoPay are 0.50% points higher. Excellent credit required for lowest rate. Rates vary by loan purpose.

Credit counseling

Getting your debt under control isn’t just a math problem to solve — it also involves building healthy financial habits. If you don’t know where to start, consider a credit counseling organization. These non-profits have certified credit counselors who can analyze your financial situation, help you figure out a plan and perhaps recommend a debt management program.

When you enroll in a debt management plan, your credit counselor negotiates new terms with your creditors. These may include waived fees and lower interest rates. The debts that are part of the plan get consolidated into a single monthly payment you make to the credit counseling agency. This isn’t a free service, but you’ll probably offset the cost in interest savings.


Declaring bankruptcy is never fun, but it may be preferable to debt settlement in some cases. You might be able to remove most of your outstanding unsecured debt and the process typically takes a few months. When compared to the years debt settlement can require, bankruptcy can sometimes get you back in the black quicker and with less pain.

Consult with an attorney or credit counselor to see if bankruptcy is a wise step for you.

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Bottom line

Debt settlement isn’t a simple way to pay less than you have borrowed. It’s a long process with no guaranteed results — but it will almost certainly tank your credit. Consider other options before turning to debt settlement, and if you do, make sure you work with a trustworthy company.

Why trust CNBC Select?

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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