Debt Settlement Programs: How They Work and What to Expect

What Is a Debt Settlement Program?

A debt settlement program is a structured plan in which a debt relief company negotiates with your creditors to accept less than the full balance on unsecured debts, such as credit cards, personal loans, or medical bills.

Instead of paying your creditors directly, you make monthly deposits into a dedicated account until there’s enough for a lump-sum offer. If the creditor accepts, the account is settled for the agreed amount, and the remaining balance is forgiven.

Debt settlement programs can be a powerful tool if you’re overwhelmed by unsecured balances, but they also come with trade-offs for your credit and taxes. Carefully consider the pros and cons of debt settlement before you sign an agreement.

How Do Debt Settlement Programs Work

If you're struggling with outstanding medical debt or maxed-out credit cards and can’t pay them off in full, enrolling in a debt settlement program is an effective option. 

Here’s a step-by-step guide to help you understand:

1. Review Your Debts and Enroll
   You'll speak with a debt settlement company about your situation, list your unsecured accounts (like credit cards, medical bills, and personal loans), and decide which ones to enroll in the program.
2. Stop Paying Creditors and Fund Your Account
   After you sign a debt settlement agreement, you stop making payments on enrolled accounts and start sending one monthly deposit to a dedicated settlement account instead.
3. Negotiations with Creditors
   Once you’ve saved enough, the debt settlement company negotiates with your creditors to accept a reduced lump-sum payoff on each account.
4. Settle and Close Your Accounts
   When a settlement is reached, funds from your account are used to pay the creditor. The account is now closed, and the remaining balance has been forgiven.

How Much Do Debt Settlement Programs Cost?

Companies may charge fees based on one of two main methods: a percentage of the total debts enrolled in the program or a percentage of the amount you save through settlement.

Typically, fees range from 15% to 25%. Some organizations may also charge additional fees for setting up and maintaining your dedicated settlement account.

Choosing a Debt Settlement Program

With so many companies offering debt settlement programs, it’s important to do your research before you choose one that fits your needs. Consider these important factors when you’re weighing your options:

• Check reviews and complaints – Look at customer reviews and any complaints filed with your state attorney general, the Better Business Bureau (BBB), or the Consumer Financial Protection Bureau (CFPB).
• Avoid upfront fees – Legitimate debt settlement companies don’t charge fees before they’ve actually settled a debt for you. 
• Compare how fees are calculated – Ask whether fees are based on the total debt enrolled or the amount saved through settlement, and make sure you understand the percentage.
• Look for transparency and accreditation – Choose companies that clearly explain their process, risks, and timelines, and that hold accreditation from reputable industry organizations.
• Be wary of guarantees – Avoid any program that promises specific results, savings amounts, or timelines, since no settlement can be guaranteed in advance.

Alternatives to Debt Settlement Programs

Debt settlement can help you pay off debt with the help of an experienced advisor. However, if you feel it's not the right option for you, consider these additional debt relief options:

Debt Management Plans

Debt management plans (or DMPs) from nonprofit credit counseling agencies can help set up a new payment plan with reduced interest rates. You'll typically pay a small monthly fee for this service.

Debt Consolidation Loan

Some consumers decide to streamline monthly payments by combining multiple debts into a single new loan at a lower interest rate using debt consolidation. Opening a 0% balance transfer credit card is another option if you have a strong credit score and carry significant credit card debts.

Debt Payoff Strategies

If you have a smaller debt balance, consider DIY debt payoff strategies, such as the debt snowball or debt avalanche, to prioritize debts and speed up repayment.

Negotiate Directly With Your Creditors

While it takes time and effort, you can also negotiate a settlement with credit card companies and lenders on your own to avoid extra fees. However, you should be prepared to offer an immediate lump-sum payment to settle debts. 

Bankruptcy

Filing for bankruptcy has significant long-term consequences, but in some cases, it may be the only option available. We recommend speaking to a bankruptcy lawyer to determine if it’s the right choice for you and your financial situation.

Is a Debt Settlement Program Right For You?

Debt settlement programs may be the right option for you if you’re at risk of bankruptcy but don’t want to file for it.

Usually, it’s a viable solution if you're facing any of these financial situations:

• Maxing out credit cards to pay bills
• Struggling to make monthly debt payments and are starting to fall behind
• Receiving calls from debt collectors
• Facing lots of late fees or balances you can’t realistically repay in full
• Carrying bad credit, making it hard to qualify for lower-interest options

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