The Pros and Cons of Debt Settlement Programs

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

Sponsored By

Are you considering debt settlement to get relief from overwhelming debt balances? It could be an ideal option, but you should understand how it works before enrolling in a program. You also want to ensure you only consider reputable companies as there are many scammers who prey on innocent, financially distressed consumers. 

Read on for the benefits and drawbacks of debt settlement to make an informed decision. 

Get Expert Debt Relief

36408 Reviews
Learn how Freedom Debt Relief, the biggest debt negotiator in the US, can help you settle unsecured debts like credit cards.

What Are the Pros and Cons of Debt Settlement?

Be sure to review the pros and cons of debt settlement before enrolling in a program. 

Benefits of Debt Settlement

Below are a few key benefits of debt settlement: 

Repay Debt Faster

Debt settlement programs are designed to get rid of debt in just 24 to 48 months*. It could take more or less time, depending on your debt load. Either way, it’s vital to adhere to the program requirements to give yourself the best chance at meeting your debt-payoff goals. More on that shortly. 

Get Relief from Your Debt

When a creditor accepts a settlement offer, and you pay the agreed-upon amount, they can no longer pursue you for the debt. This means the constant collection calls and letters in the mail will stop. 

Debt settlement can also prevent the account from being charged off by the creditor and sold to a third-party debt collector for pennies on the dollar only if the settlement occurs prior to being sold to a third party. 

Avoid Bankruptcy

Both bankruptcy and debt settlement can help you get relief from unsecured debt. However, bankruptcy may have a more severe impact on your credit health. Creditors notate your credit report when you settle a debt, which could ding your score. But bankruptcy filings remain on your credit report for seven years if you file Chapter 13 or 10 years if you file Chapter 7. Plus, a bankruptcy could cause creditors to view you in a negative light for years to come.

Get Expert Debt Relief

36408 Reviews
Learn how Freedom Debt Relief, the biggest debt negotiator in the US, can help you settle unsecured debts like credit cards.

Disadvantages of Debt Settlement

Unfortunately, there are also drawbacks to consider: 

Debt Settlement Fees

Expect to pay a fee to the debt settlement company each time you settle a debt. It’s generally between 15 percent and 25 percent of the settlement amount and comes directly from the funds in the dedicated account you create when you sign up.

Impact on Your Credit Score

Consumers that enroll in debt settlement programs forgo monthly payments to creditors and make monthly payments to the dedicated account. This could help make a case for accepting a settlement offer more appealing to the creditor. The downside is your credit score will also take a hit each time you miss a payment. Plus, you risk the account being charged off, which is also bad news for your credit score.

Tax Implications

Settling a debt for less than what you owe could also create a tax bill if the creditor forgives $600 or more of your outstanding balance. To illustrate, if you owe $25,000 and the creditor agrees to a settlement of $15,000, the IRS requires you to add the $10,000 difference to your taxable income. Consult with a tax advisor for more information about the impacts of forgiven debt amounts.

How to Enroll in a Debt Settlement Program

The first step is to find a reputable debt settlement company, like Freedom Debt Relief, with a proven track record of success. It was established in 2002 and has helped more than 8000,000 individuals resolve over $15 billion in debt to date. The company is also a proud member of the American Fair Credit Council (AFCC) and the International Association of Professional Debt Arbitrators (IAPDA). 

You can enroll in the Freedom Debt Relief Program (FDR) to get relief from your unsecured debt. This includes credit card debt, personal loans, medical bills and department store debt. There’s no cost to get started. 

Here’s how it works: 

  • Step 1: Get a free debt evaluation by scheduling a call with an IAPDA-Certified Debt Consultant. They will analyze your debts during the call and make recommendations to help resolve your debt. If you’re a good fit for the FDR program, they will tailor a plan to help you meet your debt-payoff goals. 
  • Step 2: Start making the agreed-upon monthly deposit into a dedicated account. These funds will be used to pay creditors as settlement offers are reached, along with the fees associated with the FDR program. 
  • Step 3: Negotiation experts from the Freedom Debt Relief team will start negotiating with creditors on your behalf. 
  • Step 4: Freedom Debt Relief will present settlement offers to you as they are reached for your approval. 
  • Step 5: After your approval, the funds from your dedicated account are sent to the creditor to settle the account. Negotiation fees are also paid to Freedom Debt Relief from this account. 

Ready to get started after reviewing debt settlement pros and cons? Complete the online form to request your free, no-obligation consultation. You could resolve $15,000 to $100,000 in unsecured debt in just 24 to 48 months*.

Freedom Debt Relief

*Estimates are based on prior results, which will vary depending on your specific enrolled creditors and your individual program terms. Not all clients are able to complete their program for various reasons, including their ability to save sufficient funds. Freedom Debt Relief does not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. They do not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Their service is not available in all states, including New Jersey, and fees may vary from state to state. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of debt settlement services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements we obtain on your behalf resolve the entire account, including all accrued fees and interest. C.P.D. Reg. No. T.S.12-03825.

You may also like

Do you have a charge off on your credit report? We’ll share how this impacts your credit score and strategies to resolve a charge off.
Read more

Advertisement Disclosure

Product name, logo, brands, and other trademarks featured or referred to within Banks.com are the property of their respective trademark holders. This site may be compensated through third party advertisers. The offers that may appear on Banks.com’s website are from companies from which Banks.com may receive compensation. This compensation may influence the selection, appearance, and order of appearance of the offers listed on the website. However, this compensation also facilitates the provision by Banks.com of certain services to you at no charge. The website does not include all financial services companies or all of their available product and service offerings.