What settlement attempts to do
A consumer or provider proposes resolving a debt for less than the full amount. The creditor decides whether to negotiate and what terms it will accept. Any agreement should be reviewed in writing before money is paid.
Risks that belong in the decision
- Interest, late charges, and other fees may continue to accumulate.
- Creditors or collectors may continue contacting the consumer or file suit.
- Missed payments and settlements may negatively affect credit.
- A provider may be unable to settle every account.
- Forgiven debt can have tax consequences in some circumstances.
Fee rules and warning signs
CFPB explains that a debt-settlement company may be breaking the law if it charges a fee before it achieves a successful result on at least one debt, the consumer agrees to that result, and the consumer makes a payment under the agreement.
Who may want to compare it?
People with significant eligible unsecured balances and genuine payment difficulty may decide to compare settlement with hardship plans, counseling, consolidation, and bankruptcy advice. A threshold alone does not determine suitability.
Source
Consumer Financial Protection Bureau comparison and advance-fee explanation