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Best Debt Settlement Companies for 2021
If you’re dealing with a financial hardship like job loss and struggling to pay your credit cards each month, a debt settlement company may be able to help. Debt settlement companies negotiate with creditors on your behalf to resolve your debts for less than what you owe. The best debt settlement companies have low fees and minimum debt requirements so you can sign up no matter how much debt you have. They also save clients a high average amount and have a track record of providing great customer service.
The 7 best debt settlement companies of 2021
- Best for Private Debt: Freedom Debt Relief
- Best for Niche Types of Debt: National Debt Relief
- Best for Small Debts: CuraDebt
- Best for Average Debt Reduction: New Era Debt Solutions
- Best for Low Fees: Donaldson Williams
- Best for Short-Term Debt Settlement Programs: Debt Relief A La Carte
- Best for Self Debt Settlement: ZipDebt
The best debt settlement companies at a glance
|Provider||Average savings||Fees||Minimum debt|
|Freedom Debt Relief||About 30%||15% to 25% enrolled debt||$7,500|
|National Debt Relief||30% to 50%||15% to 25% of enrolled debt||$7,500|
|CuraDebt||30%||20% of enrolled debt||$5,000|
|New Era Debt Solutions||52.23% before fees||23% of total debt||No minimum|
|Donaldson Williams||Around 55%||18% of amount saved||$15,000|
|Debt Relief A La Carte||About 55%||10% to 15% of amount saved||No minimum|
|Zip Debt||N/A||15% of amount saved||No minimum|
What is debt settlement?
Debt settlement involves negotiating with creditors to settle your debt for a lump sum payment less than what you owe. Typically, you’ll stop making minimum payments for a few months or years so you can start setting aside money for the lump sum payment. Stopping your payments gives you more negotiating power with lenders, but may also damage your credit and cause you to rack up late fees and interest.
How does the debt settlement process work?
Whether initiating debt settlement individually or through a for-profit company, the debt settlement process includes these important universal characteristics:
- Establish the amount of unsecured debt owed: Credit cards and medical bills come in at the top of the list for unsecured debt that don’t involve collateral. Importantly unsecured student loan debt falls under a special category that makes it ineligible for debt settlement.
- Consider the bigger financial picture: Qualifying for debt settlement requires a debtor to incur financial hardship caused by unemployment, the death of a spouse, and extreme overspending. Only high probabilities around the inability to pay bills in full qualify for debt settlement.
- Understand the goal of the debt settlement process: Negotiations through the debt settlement process establishes a lump-sum amount paid to a creditor in lieu of payments made toward the total amount due.
- Determine whether to hire a debt settlement firm: Debt settlement firms understand the strategies and tactics that create negotiating leverage to reach the best deal for debtors.
- Establish a savings plan to build a balance to offer creditors: With the idea of building savings to a percentage of the debt owed, debt settlement pros often advise building funds in an escrow account. Once the balance reaches a predetermined level, negotiations of the debt settlement begins.
Pros and cons of debt settlement programs
Debt settlement as an option offers both benefits and drawbacks.
- Debt settlement offers a substantially lower payoff amount than the amount initially owed. Debt settlement agreements include forgiveness of the unpaid balance once the negotiated sum is paid in full.
- Debt settlement provides a means to create a budget-friendly plan for getting out of debt, often within a two- to five-year period.
- Debt settlement offers an alternative to bankruptcy.
- Creating leverage in negotiations with creditors often means skipping payments. The idea, of course, is to set up a dichotomy to entice companies to agree to partial payment as opposed to nothing at all. While skipping payments can be an effective strategy around negotiations, the fallout can also mean endless phone calls and letters from collection agencies, the accumulation of interest, late fees, and other penalties. And there’s no guarantee a debt settlement will be reached.
- Debt settlement creates havoc on a credit score that can take years to repair. A damaged credit score wipes out any chance of getting a bank loan.
- Efforts to reach a debt settlement could fail if a creditor refuses to enter into an agreement. Failure to reach a debt settlement leaves debtors in worse shape than where they started.
- Under IRS rules, debt that’s been forgiven counts as income. While a debt settlement could save dollars going to creditors, who could create a debt when it comes to tax time.
Who should consider debt settlement?
If you have a lot of unsecured debt you can’t pay back because of financial hardship due to an event like losing your job or becoming ill, then debt settlement may be a good option for you. But because debt settlement can damage your credit score and stay on your credit report for up to seven years, it’s important to treat it as a last resort. If you can pay your debt through other means like debt consolidation, explore those options first. Also, the key to lasting change is getting your spending under control.
Alternatives to debt settlement
Consider transferring onerous balances to low-interest or no-interest credit cards. While credit card companies usually extend introductory offers to those with credit scores above 700, transferring debt with low interest is a great move for those who qualify. With these offers, a transfer fee of around 2% to 3% applies.
Create a debt management plan
A debt management plan eases debt burden through negotiated lower interest rates and payments with creditors. With this, debtors use a debt management company to determine payment amounts. Predetermined portions of payments sent to the company are then paid to creditors.
[Read: Balance Transfer Credit Cards]
Tackle debt negotiation by yourself
While debt settlement companies offer guidance and expertise in debt negotiations, some creditors don’t even negotiate with companies. What’s more, many creditors offer a smaller percentage in debt reduction to companies than to individuals.
Some creditors won’t even negotiate with debt settlement companies. Of the creditors who will negotiate with them, some might refuse to cut your debt by a greater percentage than what they would offer you directly. For that reason, many experts say it’s wise to try negotiating directly with your creditors before turning to debt settlement companies. If the idea of DIY debt settlement is appealing but you still want expert guidance, check out ZipDebt, reviewed above.
Consider nonprofit credit counseling
Reputable nonprofit credit counseling services offer help in creating a plan for better money management through budgeting and debt payment. Credit counselors provide expertise in gaining back control over the financials of life.
How to pick the best debt settlement company
Taking some time to research your options and choose the right company will make your debt settlement process go more smoothly. Here are some things you should do before you choose a company:
- See if the company you want to work with is accredited. Legitimate debt relief companies are often accredited by organizations like the American Fair Credit Council and Better Business Bureau.
- Find out what types of debt they settle. Debt relief companies usually settle most types of unsecured debt like credit cards and medical bills. But if you have niche debt like business debts or private student loans, you may have to search a little harder to find a reputable company to work with you.
- Check their fees. You can often find information about the fees that debt settlement companies charge on their websites. Compare their fees to their average savings rates and consider if their services are worth the cost.
- Check their reviews. Look at the company’s online reviews on the BBB website and sites like Trustpilot. If the company has consistently low ratings or judgments against it, then it may not be the best choice.
- See if you meet the requirements. Most debt settlement programs have minimum debt requirements you’ll need to meet to qualify. Some programs like Debt A La Carte also require you to have significant financial resources so you can pay off your debt quickly. Make sure you qualify for the program before you apply.
- Make sure the company operates in your state. Most debt relief companies don’t operate in all 50 states. Check to see if the ones you’re interested in offer their services in your state.
How much do debt settlement services cost?
Reputable debt settlement companies don’t charge you anything upfront. But if they reach an agreement with your creditors, they’ll usually charge you between 10% and 25% of the amount of debt you owed when you enrolled. Instead of charging a percentage of your debt, some companies base their fees on how much money they saved you. This often results in a lower fee.
How can debt settlement help me?
Debt settlement may help you avoid bankruptcy, which causes your credit score to plummet and shows up on your credit report for up to 10 years. When successful, debt settlement causes less damage to your credit score and takes less time to recover from because it drops off your credit report in seven years.
Another benefit of debt settlement is you may be able to pay off your debt quickly so you can get a fresh financial start. The whole process usually takes two to four years. If you get a debt consolidation loan instead, it could take as many as seven years to pay down all of your debt.
Avoiding debt settlement scams
If you’ve weighed the pros and cons of debt settlement and want to give it a go, consider these last cautionary tips as you search for a reputable company. While the industry has come a long way since a federal crackdown on unsavory practices in 2010, you’ll still need to keep the following in mind to avoid scams:
- You should be the one to initiate contact. Shady companies are more likely to aggressively search for and hound potential clients.
- Do your homework. Look at the company’s Better Business Bureau rating and any other online reviews you can find. Almost every company will generate complaints, but some will generate far more than others.
- You shouldn’t pay any upfront fees. In 2010, the Federal Trade Commission banned these for any company that does business over the phone, driving many shady companies out of business. But some continue to find loopholes in the rules.
- No company can guarantee results. It’s ultimately up to your creditors, not the debt settlement company, whether or not they will settle your debts. If you see such a guarantee, move along.
- Collection calls and lawsuits are still a risk. A debt settlement company can’t stop a creditor from these actions if they’re determined to take them.
- The company has to make several disclosures before you sign up. Those include what you’ll be paying, how long the program will last, and the potential negative effects of not paying your creditors during a settlement plan.
We welcome your feedback on this article and would love to hear about your experience with the debt settlement companies we recommend. Contact us at email@example.com with comments or questions.