You can negotiate debt yourself or hire a debt settlement company. These companies typically charge 15% to 25% of the debt balance for their services. You only pay if they negotiate a settlement and you agree to it. Professional debt help can be useful if you're inexperienced or uncomfortable negotiating or if you have several accounts to resolve.

Debt settlement only works with unsecured accounts like personal loans, credit card balances, medical debt, collection accounts and sometimes private student loans. It doesn't work with secured debt because lenders can simply take the loan's collateral if you fail to repay. It's important to understand that creditors are under no obligation to settle with you. During the debt settlement process, you can expect collection efforts to continue – phone calls, notices and other contact. Sometimes, creditors even file lawsuits.

How Does Debt Settlement Work?

Here's what you can expect once you enroll in a debt settlement program:

1. You need to come up with a lump sum to offer your creditors. If you can't withdraw it from savings or borrow it, you'll stop paying on some of your debts. Instead, you divert that money into a debt settlement savings account. On average, it takes four to six months to settle your first account, and two to four years to complete the entire process if you settle multiple debts.

2. You'll probably hear from creditors and debt collectors. After you stop paying your accounts, expect calls, notices and other contact from creditors and debt collectors. They could even choose to file a lawsuit; this is more likely if you ignore their attempts to speak with you. The debt settlement company may advise you on how to deal with calls.

3. Your debt relief company will contact your creditors once you have saved enough money to make an offer. Your debt settlement professional will attempt to negotiate a settlement that you and the creditor can agree on.

4. If an agreement is reached, your debt settlement professional will present it to you. You can choose to accept the offer or decline it. By law, you only pay debt settlement fees if you accept the offer and make the payment. You will pay the creditor's lump sum and the debt settlement company's fee.

5. Your account will probably be closed. The creditor will probably report the account as 'settled for less than the amount owed' to credit bureaus. Any unpaid balance on the account is forgiven.

Who Qualifies for Debt Settlement?

- Have an unmanageable amount of unsecured debt

- Do not want to file for bankruptcy or don't qualify for a Chapter 7 bankruptcy

- Can demonstrate a hardship or reason for creditors to settle with you

Creditors might be willing to settle for less than the full amount you owe if the alternative is getting no money at all or taking costly legal action. If you just want to reduce your payments, then debt settlement is probably not for you.

'Debt settlement is an option for consumers who can't afford their current debt payments and either can't or won't file for bankruptcy, says Gerri Detweiler', credit expert and co-author of 'Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.'

What Are the Pros and Cons of Debt Settlement?

Pros

- You may reduce what you owe.

- Debt settlement is private. Unlike bankruptcy, which is public and takes place in the court system.

- You can choose to accept or decline a settlement offer. With bankruptcy, a judge tells you what you'll pay or which property you'll surrender.

- Collection calls stop after you settle your account.

Cons

- You may not be able to settle some debts. Results are not guaranteed, and some creditors do not negotiate with debt settlement companies.

- Missed payments will accumulate late fees, penalties and other charges that could make settlements less valuable.

- Your forgiven debt may be taxable.

You will pay a fee to the debt relief company when an account is settled.

How Much Do Debt Settlement Companies Charge?

Debt relief companies may charge a percentage of the debt enrolled in the settlement program or a percentage of the amount you save through each settlement.

ypical fees range from 15% to 25% of the debt you enroll in the settlement program. If you enroll $10,000 and settle for $5,000, you can expect to pay a debt settlement fee of $1,500 to $2,500.

If you have multiple debts and a debt relief company settles one of them, you only pay for settling that one account. If, for instance, you enroll a $5,000 account, a $10,000 account and two $2,500 accounts, the fee for settling all $20,000 might be $5,000. If the first account the company settles is $2,500, you'd just pay the fee for that account: up to $625. If it settles the $10,000 account, you'd owe up to $2,500. By law, you can only be charged a debt settlement fee when the account is settled.

Note that you could pay additional fees to set up and maintain a savings account with the debt settlement company.

How to Choose the Best Debt Settlement Company

When choosing a debt settlement company, focus on five key areas:

- Eligibility. Make sure the company can settle the type and the amount of debt you have. Many companies will only settle specific types of debt, such as credit cards or medical bills. And most companies require you to enroll a minimum amount of debt.

- Fees. Look for a debt settlement company that charges the lowest fee percentage. Consider savings account and other fees as well.

- Accreditation. Verify that a company is accredited by the American Fair Credit Council, the International Association of Professional Debt Arbitrators or, ideally, both. These groups require members to meet certain standards designed to help consumers.

- Transparency. Debt settlement can't protect you from debt collectors, lawsuits or hits to your credit score, and a good debt relief company will be transparent about these facts. Check the company's website for disclosures about the effects of settlement on your credit score.

- Customer service. Check the Better Business Bureau and the Consumer Financial Protection Bureau's Consumer Complaint Database for reviews and complaints.

What Are the Alternatives to Debt Settlement?

- Debt management plans. A DMP consolidates your debts into one monthly payment and establishes a plan to pay them off in three to five years. A credit counseling agency creates and manages your plan, and a counselor may be able to negotiate lower interest rates and get certain fees waives. You make a monthly payment into the plan and your credit counselor distributes it among your creditors. Your payment also includes a debt management fee.

- Debt consolidation loans. A debt consolidation loan replaces multiple accounts with one loan and payment. The new loan ideally features a lower interest rate, a lower monthly payment or both.

- Balance transfer credit cards. A balance transfer allows you to move debt from one or more credit cards to a new one. Cards for people with good credit offer a 0% APR on transferred balances for 12 to 21 months. Expect to pay a balance transfer fee; 3% to 5% is typical.

- Bankruptcy. Filing bankruptcy stops collection efforts. Bankruptcy takes place in court, and you and your creditors must abide by a judge's decision.

- Direct negotiation. You can negotiate with your creditors yourself if you don't want to work with a debt settlement company. 'There's nothing a debt settlement company can do for you that you can't do for yourself,' says credit expert John Ulzheimer, formerly of FICO and Equifax. 'If you're having a hard time making your payments, then talk to your lender. They'd rather work with you than with a third-party settlement company.'