When Debt Settlement is the Smart Thing to Do

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Before you make any big decisions like hiring a debt settlement company to attempt to settle your debts, it’s important that you understand how it works, what you’re getting into, and the other options you may have. Debt settlement can have a big impact on your personal finances let’s talk about when debt settlement is a smart decision and when perhaps it’s not.

How Debt Settlement Works

The first thing to understand is that debt settlement will generally only work on unsecured debt such as credit cards and other bills that have gone into collections. If you’re behind on your mortgage or car loan, you’re not going to be able to settle because a car can be repossessed and a house can be foreclosed on. Debt settlement also will not work with student loans.

You have two options with debt settlement. You can sign up with a debt settlement company and have them negotiate with your creditors, or you can do it yourself and negotiate directly with your creditors. Let’s go over the pros and cons for each option.

How Debt Settlement Companies Work

When you sign up with a debt settlement company they’ll direct you to stop making payments on your debts. Instead, you’ll put the money in a dedicated savings account that they set up for you. When there is enough money in the account for them to make a lump sum settlement on the debts, they’ll start negotiating with your creditors.


  • They know how to negotiate with creditors.
  • By law they can’t charge upfront fees.
  • They will probably be more successful at negotiating than you.
  • The fees are reasonable.


  • You credit score will tank because you stop making payments.
  • Collectors won’t stop from attempting to collect payment from you.
  • You’ll have to pay the debt settlement company a 10%-15% fee.

Do it Yourself Debt Settlement

The other option you have if you’re behind on your bills is to simply reach out to your creditors yourself and offer them a lump sum that’s less than the current balance. This works best with collections and debts that have been charged off. The older the debt, the more luck you’ll have settling for a significantly lower amount.

You shouldn’t be nervous about settling with creditors. The most important thing is to save up enough money to offer them a reasonable lump sum payment. A major advantage with negotiating yourself is that in addition to paying off the debt, you can also ask that in exchange for a lump sum payment, they also remove the negative entry from your credit report.


  • Less negative impact on your credit score.
  • No additional fees.
  • You can negotiate the removal of negative entries on your credit report.


  • You have to negotiate the settlement yourself.
  • You probably have less experience negotiating with creditors than debt settlement companies.

Debt Settlement Company or Do it Yourself?

Which route you choose is really up to you. I think it boils down to how comfortable you feel negotiating with creditors. If that’s something that you’d really rather have an experienced negotiator deal with, than a debt settlement company is probably for you. Just keep in mind that you’ll have to pay for it. Negotiating with creditors yourself can be a really great learning experience. I did it myself back when I had some old debts that I needed to settle.

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