Debt Settlement Companies: What Are They & How They Work

Shawn Manaher
Shawn Manaher
Updated on November 11, 2022
what are debt settlement companies

It's estimated that nearly 40 million Americans are in some form of debt they can't repay. So, when people are struggling to make payments on their debts, they may find themselves overwhelmed and stressed. This is when many people turn to debt settlement companies for help. Debt settlement companies can provide debt relief for people struggling with debt payments.

Debt settlement companies are businesses that negotiate with creditors on behalf of their clients to settle the debt for less than the full amount owed. The debt settlement process typically begins with a debt settlement company contacting the debtor's creditors and requesting a reduced payoff amount. If the creditor agrees to the debt settlement company's request, the debt settlement company will pay off the debt in full, thus creating debt relief.

In this article, we will discuss what debt settlement companies are, how they work, the pros and cons of using them, and some alternatives to using a debt settlement company.

debt settlement

How Do Debt Settlement Companies Work

Debt settlement companies work by negotiating with your creditors to lower your overall debt. This can be done by either reducing the interest rate that you're paying or by forgiving a portion of the debt itself. In some cases, debt settlement companies may also be able to negotiate a lower monthly payment for you.

Most debt settlement companies will charge you a fee for their services. This fee is typically a percentage of the total debt they settle for you. For example, if a company settles $10,000 of debt for you, they may charge a 20% fee, which would come out to $2,000.

There are a few things to keep in mind before working with a debt settlement company.

First, make sure that the company is legitimate by doing your research. There are a lot of scams out there, so you'll want to be sure that you're working with a reputable debt settlement company.

Second, be aware that debt settlement will hurt your credit score. This is because when you settle debt, it's reported as "paid as agreed" on your credit report, which is seen as negative by lenders.

Lastly, ensure that you understand the settlement terms before agreeing to anything. Once you agree to a settlement, you're typically committed to it and can't back out.

Debt settlement may be an option worth considering if you're struggling with debt. Just be sure to research and understand the pros and cons before committing to a debt settlement company.

Pros of Using A Debt Settlement Company

When you're in debt, it can feel like you're never going to get out. But there is hope! One option for getting out of debt is to use a debt settlement company. A debt settlement company can help you negotiate with creditors to pay off your debt for less than you owe. This can save you a lot of money and help you get out of debt faster.

There are several pros to using a debt settlement company:

  1. You may be able to settle your debt for less than you owe. This can save you a lot of money and help you get out of debt faster.
  2. A debt settlement company can negotiate with your creditors on your behalf. This can save you a lot of time and hassle.
  3. You may get out of debt faster by using a debt settlement company.

Cons of Using A Debt Settlement Company

There are a few potential downsides to using a debt settlement company that you should be aware of before you decide to use one:

  1. It's important to understand that debt settlement companies typically charge fees for their services. These fees can add up, and they're often a percentage of the total debt that you're hoping to settle. That means the more debt you have, the more you'll ultimately pay fees.
  2. There's no guarantee that a debt settlement company will be able to negotiate successfully with your creditors and get them to agree to a settlement. If they're unsuccessful, you'll still be responsible for repaying your full debts.
  3. Even if a debt settlement company is successful in negotiating a settlement, you may end up having to pay taxes on the amount of debt that's been forgiven.

For all these reasons, it's important to carefully consider whether or not a debt settlement company is right for you. If you're unsure, it might be a good idea to speak with a financial advisor or accountant to get their professional opinion.

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Do Debt Settlement Companies Work?

Debt settlement companies offer a way to get out of debt without declaring bankruptcy. But do they work?

The answer is: maybe.

Debt settlement companies typically try to negotiate with your creditors to get them to agree to accept less than the full amount you owe. If they are successful, you will pay off your debt over time in monthly payments, plus a fee to the debt settlement company.

They only sometimes work because creditors aren't required to accept the settlement offers. And even if they accept a settlement, it will likely damage your credit score, and you may still end up owing taxes on the forgiven debt.

Before considering a debt settlement company, understand the risks and explore other options. You might be able to negotiate with your creditors or use a debt consolidation loan to get out of debt.

What Do Debt Settlement Programs Look Like?

A debt settlement program is a plan that helps you pay off your debts for less than what you owe. It's a way to get out of debt without going through bankruptcy.

With a debt settlement program, you'll work with a company to create a lump sum payment that's less than the full amount of your debt. The company will then use that money to pay off your creditors.

You'll be left with one monthly payment to the company, and after a certain period, usually two to five years, your debt will be considered settled.

The debt settlement process can be a good option if you're struggling to make monthly payments or are at risk of defaulting on your debt. It can also be a good choice if you're not eligible for other forms of debt relief, such as debt consolidation or debt management.

However, there are some risks before enrolling in debt settlement programs.

For one, your credit score will likely take a hit. And second, you may end up paying more than you would if you continued to make minimum payments on your debt.

If you're considering enrolling in any debt settlement programs, it's important to do your research and choose a reputable company.

Do Debt Settlement Services Cover Unsecured Debts?

No. Unsecured debts, like medical bills and credit card debt, are not covered by debt settlement services. That’s because there’s no collateral—like a house or car—to back up the debt. So, if you stop making payments on your unsecured debts, your creditors can’t take your property to recoup their losses.

Creditors are, however, more likely to work with you on your unsecured debts because they know they can’t get their money back any other way. They may be willing to lower your interest rate or agree to a payment plan. But, if you stop making payments, they can still sue you and try to collect the debt.

If you have unsecured debt, while you won't be able to work with debt settlement services, you may want to consider a debt management program instead of debt settlement. A DMP is a type of credit counseling that can help you get your debts under control. With a DMP, you make one monthly payment to the credit counseling agency, which then distributes the money to your creditors.

bad debt couple

How Much Does A Debt Settlement Company Cost?

Debt settlement companies typically charge a percentage of the total debt owed plus a fee for their services. The average fee is 15-20% of the debt owed, with some companies charging as much as 25%. If you owe $20,000 in credit card debt, you could pay $5,000-$6,000 fees to the debt settlement company. In addition to these fees, you will also have to pay taxes on any forgiven debt, which could add $2,000-$3,000 to your total costs.

So how much does a debt settlement company cost? It depends on how much debt you have and what type of fee structure the company uses. However, you can expect to pay several thousand dollars in fees plus taxes on any forgiven debt.

If you're considering using a debt settlement company, research and choose a reputable company with a good track record. You can also negotiate with your creditors directly to try to settle your debts for less than you owe. However, be aware that this option may damage your credit score and make it more difficult to get approved for new credit.

Are Debt Settlement Companies Free?

No, there are no free debt settlement companies. While some may charge nominal fees, you will typically have to pay a percentage of your debt to have it settled. This can be costly and is not recommended unless you are in severe financial distress.

Some companies may guarantee that they can settle your debt for a certain amount, but this is often different. It is important to do your research before selecting a company to work with.

Debt Settlement Company Alternatives

If you're not sure whether or not debt settlement is right for you, consider these alternatives:

  1. Do-it-yourself debt settlement: If you're confident in your ability to negotiate with creditors on your own, you can try to settle your debts yourself. Be aware that this process can be time-consuming and difficult, and there's no guarantee you'll be successful in settling.
  2. Debt management: If you're struggling to make ends meet each month, a debt management plan may be a good option. With debt management, you make one monthly payment to a credit counseling agency, which distributes the funds to your creditors. This can help you get out of debt faster than making minimum payments on your own.
  3. Debt consolidation: If you have several high-interest debts, consolidating them into one loan with a lower interest rate can save you money in the long run. This can be a good option if you need help keeping up with multiple monthly payments.
  4. Bankruptcy: This is usually a last resort option, but if you cannot repay your debts, bankruptcy may be the best solution. filing for bankruptcy can help you get out of debt and start fresh. However, it will also have a major impact on your credit score, so it's important to weigh your options before deciding if this is the right choice for you.

No matter what option you choose, remember that getting out of debt takes time and patience. It's important to stay disciplined and make sure you're making progress toward becoming debt-free. If you need help, plenty of resources are available to help you get started on your journey to financial freedom.

If you're struggling with debt, don't hesitate to seek help. There are plenty of resources available to help you get back on track. And if you're considering bankruptcy, make sure you understand the implications before making a decision.

Best Debt Settlement Companies

Below are some of the best debt settlement companies available to help you get debt relief in the quickest way possible:

National Debt Relief

National Debt Relief has been in business for years, helping people to consolidate their debt and get back on track financially. They've helped thousands of people get out of debt and can help you.

Freedom Debt Relief

Freedom Debt Relief has been in business for over a decade, and as a debt relief company, they have helped over 100,000 people get out of debt.

New Era Debt Solutions

New ERA Debt Solutions has been in business since 2008 and is one of the most reputable debt settlement companies in America. They've helped settle over $1 billion in debt for their clients and have an A+ rating with the Better Business Bureau.

Accredited Debt Relief

Accredited Debt Relief has been a debt relief company for over a decade. They've helped over 150,000 families, and individuals become debt-free, making them one of the best debt settlement companies.

Pacific Debt Inc.

Pacific Debt Inc. has been in business for over ten years and is one of the leading debt settlement companies in the nation. They have settled over $1 billion in debt for their clients and have an A+ rating with the Better Business Bureau.

tired men debt

What Is National Debt Relief?

National Debt Relief is a top-rated debt settlement company that has helped over 100,000 people settle their debts. They are a BBB-accredited business with an A+ rating, and we have been featured on Forbes, CNBC, and other major news outlets.

National Debt Relief has an average client savings rate of 50% on their enrolled debts within 24 months and has a 96% success rate in settling their clients.

Is National Debt Relief Legit?

As someone dedicated to helping people get out of debt, I get a lot of questions about different debt relief options. People want to know if they're legit and if they'll work.

National Debt Relief is a legitimate debt relief company that has helped thousands of people get out of debt. The company is accredited by the Better Business Bureau and has an A+ rating.

The company works with your creditors to negotiate lower payments, interest rates, and fees and create a debt settlement plan. They also work with you to create a budget and make a plan to get out of debt.

What is The American Fair Credit Council?

The American Fair Credit Council is a national trade organization representing the interests of the credit counseling and debt settlement industry. The AFCC sets high standards for member companies to protect consumers and provides educational resources to help consumers make informed decisions about their finances.

If you're considering using a credit counseling or debt settlement company, make sure they are a member of the American Fair Credit Council. You can find AFCC-approved companies on our website.

The American Fair Credit Council also offers resources to help you understand your options and make informed decisions about your finances. Visit their website to learn more.

Is Debt Relief The Same As Debt Consolidation?

No. Debt relief is different from debt consolidation. Debt consolidation rolls your debts into one payment, but you still pay off the full amount you owe. Debt relief pays off a portion of your debt, which can help reduce your monthly payments and the overall amount you owe.

If you’re considering debt relief, it’s important to know that there are both good and bad ways to get it. Some methods, like working with a settlement company, can cost you more in the long run, while others, like getting a personal loan from a peer-to-peer lender, can help you save money and get out of debt faster.

How Do I Find A Debt Relief Company?

There are many different ways to find a reputable debt relief company. You can ask friends or family for recommendations, search online, or even contact your financial institution for referrals.

Once you've compiled a list of potential companies, it's important to do your research to make sure they're legitimate and will be able to help you resolve your debt problems. Some things you'll want to look for include:

  • A proven track record of helping people get out of debt
  • Accreditation from an organization like the Better Business Bureau
  • Positive customer reviews

When you've found a few companies that meet these criteria, it's time to give them a call and see what they can do for you.

What Are Debt Consolidation Loans?

A debt consolidation loan is a type of loan that allows you to pay off multiple debts with a single monthly payment. This can be a great way to simplify your finances and reduce your monthly expenses.

Debt consolidation loans are available from many different lenders, including banks, credit unions, and online lenders. You can use these loans to consolidate credit card debt, medical debt, student loan debt, and more.

There are a few things to consider before you apply for a debt consolidation loan. First, you need to make sure that you have a good credit score. You also need to make sure that you can afford the monthly payments.

Shawn Manaher

Shawn Manaher

Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author.

He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.

He loves to share his personal finance tips and money management wisdom with others to help them find financial freedom.
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