Can I afford debt settlement?

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Debt settlement companies typically charge 15% to 25% of the enrolled debt amount, and federal law limits when they're allowed to collect it: under the FTC's Telemarketing Sales Rule, they can't collect a fee until they've actually settled at least one of your debts and you've made a payment toward it. Any forgiven balance over $600 is also generally reported to the IRS as taxable income. Because payments into a settlement account are typically an ongoing monthly cost, this calculator weighs that amount against your income and any existing debt.

These key factors affect debt settlement affordability

How the program actually works

Debt settlement companies typically instruct you to stop paying your creditors directly and instead deposit money into a dedicated account each month. Once enough has built up, often 24 to 48 months later, the company uses it to negotiate lump-sum settlements with creditors one at a time. In the meantime, missed payments continue showing up on your credit report, and creditors remain free to pursue collections or file a lawsuit during that gap.

Fees and the tax bill on forgiven debt

Add the settlement company's fee, commonly 15% to 25% of the enrolled debt, to the tax bill on whatever gets forgiven: the IRS generally treats any forgiven amount over $600 as taxable income, reported on a 1099-C. Settle a $10,000 balance for $5,000, in other words, and you can still owe income tax on that $5,000 difference, on top of the fee for the service that negotiated it.

Credit score impact and alternatives

Scores typically fall sharply once payments stop, and a settled account stays marked as such on your credit report for seven years, which can affect approval odds down the line. A nonprofit debt management plan works differently: payments continue on the original schedule, usually at a reduced interest rate the counselor negotiates, so it tends to be gentler on credit even when it accomplishes something similar.

How to use your results

Add the settlement fee and any expected tax on forgiven debt to the monthly figure before judging true affordability.
If the risk result is high, compare this option against a nonprofit credit counseling debt management plan.
Keep enough set aside to handle a potential lawsuit from a creditor during the months before a settlement is reached.

Ways to make debt settlement more affordable

Contact your creditors directly first to see if they'll offer a hardship plan or settlement without a third-party fee.
Set aside money for the tax bill on any forgiven debt so it doesn't arrive as a surprise the following spring.
Compare the total cost, fees plus taxes plus credit damage, against a debt management plan through a nonprofit credit counselor.
Negotiate the settlement company's fee percentage before enrolling, since it's often more flexible than advertised.

More everyday services calculators

Peer comparison data

Bureau of Labor Statistics (median income by age), Experian (credit score by age)

Used by the “how you compare” figures in the sidebar, not by the costs on this page.

Every figure on this site, with its source and the date it was last verified