Advertiser Disclosure

Editorial Note: Blueprint may earn a commission from affiliate partner links featured here on our site. This commission does not influence our editors' opinions or evaluations. Please view our full advertiser disclosure policy.

If you’re feeling overwhelmed by debt and having trouble keeping up with payments, it’s smart to take a breath and consider all of your options. While many people consider debt settlement as an easy way out, this strategy isn’t guaranteed and has a major impact on your financial health in the following years. 

What is settling your debt?

The process of settling debt refers to talking with a creditor to reduce your outstanding balance. It’s an option if you’re incredibly overwhelmed financially. “Debt settlement may be your best bet if you’re worried about getting sued for debt and dragged into a drawn-out legal battle,” says Lyle Solomon, principal attorney at Oak View Law Group in Rocklin, California.

Debt settlement companies can help you negotiate with creditors (for a fee), but they can be risky. In some cases they may advise you to stop making payments, “which could result in additional interest charges and late fees being assessed by your creditors,” Solomon says. The Consumer Financial Protection Bureau (CFPB) warns that debt settlement agencies can charge high fees and ultimately leave you with worse debt and a tanked credit score.

Debt settlement will be recorded on your credit report as “settled” and will remain for up to seven years. 

There’s no guarantee that a debt settlement strategy will work — there is no legal requirement that lenders allow you to pay less — and if you go forward with it, you need to do so carefully.

What is paying in full?

“Paid in full” is a term used on credit reports to indicate you met your financial obligation and repaid the entire balance of an installment loan, like a car loan, personal loan or mortgage. “This shows a responsible and good-standing repayment history, which is the most heavily weighted factor in your credit score,” says Ohan Kayikchyan, PhD, CFP and founder of The Money Doctor. 

Once a positive account is closed, it’ll stay on your credit report for 10 years, giving your score a boost and a solid record for future lenders to consider. For credit cards, paying in full keeps your open account in good standing and clears away any remaining “charge off” debt you owe on a closed account. 

Is it better to settle debt or pay in full?

Paying debt in full is almost always the better option when possible. Research debt payment strategies — debt consolidation could be a good option — and consider getting financial counseling. 

Many organizations offer free or low-cost help, including credit unions, religious organizations and non-profit agencies such as the and the . Members of the U.S. armed forces can use this to find assistance.

A counselor can help you decide whether settling debt is right for your situation and make sure you understand all of your available options. If you’re unable to make any payments, debt settlement may be a preferred alternative to letting debt go into collections. 

The U.S. Department of Justice maintains you can filter and search through.

In the end, how to handle your debt is an extremely personal decision. Take a look at how realistic it is to pay off your balances, research strategies that work well for you and consider getting professional help from a trained credit counselor.

Pros and cons to settling your debt

You need to heavily weigh the pros and cons before you attempt the debt settlement process.

Pros of debt settlement

  • Get out of debt faster: Debt settlement programs often take 36 months (three years), which could be faster than making small payments on your entire debt over an extended period of time. 
  • Avoid legal issues: Establishing a debt settlement plan and following through on it can help you avoid bankruptcy and lawsuits. 

Cons of debt settlement

  • Negative impact to your credit score: There’s no way getting around it — debt settlement will ultimately hurt your credit score. That can make it difficult to qualify for financial products in the future, including credit cards, mortgages and car loans. 
  • Expensive fees paid to debt settlement agencies: It’s certainly possible to negotiate your debt directly with your creditors. But there are also agencies that do it on your behalf, for a fee. “Debt settlement costs can add up quickly between initial fees, ongoing fees and payments to third-party escrow services,” Solomon says.
  • No guarantee of success: Lenders don’t want to accept less money. There’s no guarantee that this strategy will work and — if you roll the dice and stop making payments while a settlement company negotiates on your behalf — you could incur tons of fees and damage your credit score even more. 
  • Tax consequences: Many people don’t know that canceled debt typically counts as taxable income, unless you qualify for an exclusion. 

Pros and cons to paying your debt in full

Thinking about paying your debt in full? Here’s what to consider.

Pros of paying debt in full

  • Improve your credit score: Making on-time payments does wonders for your credit score. Even if it takes a long time, you’ll build a stronger credit history that’ll help you qualify for and pay less for loans in the future. 
  • Avoid going into collections: You’ll avoid having a collection agency take over the repayment process, which can be extremely unpleasant. 
  • Gain peace of mind: You’ll feel less stressed by taking care of your debt and paying in full. A recent study showed that 56% of Americans who have debt feel that it causes a negative impact on their lives.

Cons of paying debt in full

  • No savings on balance: By paying in full, you’ll have to repay everything you owe, completely, plus any interest and fees.
  • May take longer: Depending on your repayment plan and your life circumstances, it could take a long time to repay your full balance. 

Pay for delete debt: Is it possible?

A pay for delete strategy gets a negative item removed from your credit report by a creditor or collection agency in exchange for a fee paid or partial payment of your outstanding balance. This process is a part of debt settlement negotiation because you are looking to settle a debt for less than what you owe. It’s possible, but you must get the terms finalized in writing so you can hold the creditor or collector accountable.

What happens if I don’t pay?

If you stop making payments on your debt, the account will eventually go to a collections agency. “Obviously, debt settlement is a better option for positive credit history versus not paying it at all and later dealing with collection agencies and its bad consequences after,” says Kayikchyan. 

Once the account goes to collections, you’ll likely get aggressive phone calls and letters. At some point, you might even be sued. If the court doesn’t rule in your favor, your wages could be garnished to repay your creditor.

Frequently asked questions (FAQs)

Your credit report will show that the balance was repaid for less than the original amount owed. It will stay there for seven years, although the impact on your actual score will decrease over time. Another factor is whether or not your payments were on time before you settled the account — a better payment history will result in a better credit score.

Settled debt is seen as income by the IRS, so you might pay taxes. Taxes will vary depending on the debt. Although you will most likely have to pay income taxes on the forgiven amount, there are some exceptions. One exception is student loan debt forgiveness.

It depends on your personal situation. Consult a professional credit counselor to weigh all of your options. 

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Lauren Ward


Lauren Ward is a writer who covers all things personal finance, including banking, real estate, small businesses, and more. She lives in Virginia with her husband and three children.

Jenn Jones


Jenn Jones is the deputy editor for banking at ӣƵ Blueprint. She brings years of writing and analytical skills to bear, as she was previously a senior writer at LendingTree, a finance manager at World Car dealerships and an editor at Standard & Poor’s Capital IQ. Her work has been featured on MSN, F&I Magazine and Automotive News. She holds a B.S. in commerce from the University of Virginia.

Maddie Panzer


Maddie Panzer is the Updates Editor on the ӣƵ Blueprint team. Prior to joining the team, she studied journalism at the University of Florida. During her studies, she worked as a reporter for the New York Post, WUFT News and News 4 Jacksonville. She was also editor-in-chief of her school’s magazine, Orange and Blue. Maddie holds a B.S. in Journalism.