Is Debt Settlement Right for You? Here's What the Real Savings Look Like

When you’re drowning in debt, a debt settlement company might seem like your salvation. The industry proudly points out that about 75% of participants manage to settle their debts for less than the full amount owed. But here’s the uncomfortable truth: after you account for all the fees, interest charges, and other hidden costs, your actual savings might be far less impressive than the marketing promises.

The True Cost of Using a Debt Settlement Company

Let’s start with what you’ll actually pay these companies. By law, debt settlement companies can only charge you once you’ve accepted a settlement offer. On average, that fee comes out to around $762 per debt settled — which represents about 17% of the settlement amount itself. Since the average person enrolls about seven different debts into a program, the total fees can mount quickly.

But the company fees are just the beginning. Consider these additional expenses:

Interest and penalties keep accruing while you’re trying to settle. Industry data shows account balances grow by an average of $494 (about 12% of the original debt) due to accumulated interest and late fees. Then there’s the monthly charge from the savings account holding your settlement funds — typically $5 to $10 monthly, which adds up to $480 over a four-year program.

Tax liability is another surprise many people don’t anticipate. Forgiven debt is treated as income, and at a typical 12% tax rate, that could cost you around $1,000 in additional taxes.

Credit score damage is inevitable since the program requires you to stop making regular payments. While temporary, this delinquency can result in higher interest rates and denied applications for future credit.

Legal fees may apply if creditors sue instead of negotiate — though some companies include legal coverage in their package.

Breaking Down the Real Numbers

Here’s where the story gets clearer. Using data from a 2021 industry report, the average debt settlement client entered the program owing $27,756. They successfully negotiated settlements on $17,032 of that debt, with an average settlement amount of $8,365 (saving $8,667 before fees).

Sounds great, right? But after paying $3,225 in company fees and roughly $360 in savings account charges over 36 months, their net savings dropped to $5,082 — about 30% off the settled debt.

The problem? They couldn’t successfully settle all their debts. That means the actual savings on their entire original debt was only 18%, not 30%.

And that’s before factoring in the $1,000+ in taxes or the interest that kept accumulating on unsettled accounts.

How Long Does This Actually Take?

Most people should expect the process to take about four years from start to finish. Here’s why:

Debt settlement companies typically need you to save roughly 20% of each debt’s balance before they can credibly approach creditors. If you’re carrying significant debt, this accumulation phase takes time. You’ll probably see your first settlement offer within four to five months, but from there, each debt gets negotiated individually — and some creditors are simply unwilling to negotiate at all.

How quickly you can wrap up depends on several factors. The amount of debt you have, whether you’re consistent with your monthly deposits, your creditors’ willingness to deal, and whether you’ll accept payment plans instead of lump-sum settlements all play a role.

So Should You Use a Debt Settlement Company?

The answer depends on your situation. If you successfully settle all your debts, your savings could be substantial. But statistically, about one in four participants don’t manage to settle any debts at all.

The 18% average savings rate across all enrolled debt assumes you stick with the program for years and successfully negotiate most of your accounts. When you factor in taxes, credit damage, and ongoing interest charges, the actual financial benefit becomes much less certain.

Consider this option primarily if:

• You have substantial unsecured debt (credit cards, personal loans)
• You can afford consistent monthly deposits for several years
• Your creditors are known to negotiate
• You understand and can weather the credit score impact

For many facing debt, exploring alternatives like bankruptcy, credit counseling, or aggressive payment plans might yield better results with fewer hidden costs. Before you commit to any debt settlement company, calculate your specific numbers — because the industry average might not reflect your personal scenario.