Debt settlement offers a way to eliminate your debt by paying a fraction of what you owe. While it’s not an ideal solution, consumers who have exhausted all other alternatives may consider debt relief programs.

Working with debt settlement companies carries significant risks and drawbacks. You should choose this option only after you’ve thoroughly researched the settlement process and understand whether the benefits outweigh the risks for you.

U.S. News researched the leading debt relief companies accredited by the International Association of Professional Debt Arbitrators or the American Fair Credit Council. Top debt settlement companies were evaluated based on key factors, including settlement program time frame, types of debt settled, minimum debt requirements, fees and customer satisfaction.

When you settle a debt, your creditor agrees to accept less than what you owe to resolve it.

Debt settlement programs are typically offered by for-profit debt relief companies. When you enroll in the debt settlement process, you will stop paying on your credit card balance and instead make payments to a dedicated account.

Once you’ve accumulated enough money, the debt settlement company may begin negotiations with the credit card company to accept these funds as a settlement to close the credit account. This process can be effective yet problematic.

Stopping payments on your credit cards – even under a debt settlement program – may not be a wise strategy. John Ulzheimer, a credit expert who formerly worked at FICO and Equifax, says, “It’s never a good idea to skip your payments – ever. I recognize this is a common strategy suggested by the debt settlement companies, but this can lead to negative credit reporting and collection lawsuits.”

Debt settlement isn’t an option if you’re paying your bills and just want a discount. But if you’ve stopped making payments and your credit report is already littered with missed payments, creditors know they’re in danger of not receiving any repayment without a costly lawsuit. Creditors might be willing to settle for less than the full amount you owe rather than write it off as a loss or take legal action.

“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.”

You could settle your account for less than the full amount but further damage your credit score – and enrolling in a debt settlement program doesn’t protect you from being sued.

There are few advantages and many disadvantages to debt settlement.

Debt settlement companies either charge a percentage of your total enrolled debt or the debt settled.

If they charge based on settled debt, you pay a percentage of the debt that was eliminated. Most companies charge 15% to 25% of the reduced debt amount. For example, if your debt relief company eliminates $10,000 of your debt and charges a 25% fee, you’ll pay $2,500.

If you set aside money in a dedicated account with the debt settlement company, the account is managed by a third party and will typically require fees.

Debt settlement typically has a negative effect on your credit history, both during the process and once the debt is settled. If you have fair or bad credit now, don’t expect debt settlement to improve it.

“Unfortunately, you can’t have it both ways: You can’t settle debts for less than what you owe and avoid damage to your credit,” Detweiler says. “You have to decide what’s most important to your financial health: protecting your credit or getting out of debt. In many cases, getting out of debt is the more important goal in the short term.”

Payment history and credit utilization are the two most important factors for your credit score. If your debt settlement agreement requires you to stop making payments to creditors, both will be negatively affected. Once the account is settled, it will still negatively impact your credit because it’s not reported as paid in full.

“Settlements are considered to be major (derogatories) in both FICO and VantageScore’s scoring systems,” Ulzheimer says. “As such, they can certainly result in lower scores.”

When you settle for less than the full repayment, the account will remain on your credit report as settled for less than the full amount. Settled accounts can remain on your credit report for up to seven years from the original delinquency date or the date reported as settled if the account was not in collections.

“Settled debts are not removed simply because they’ve been settled,” Ulzheimer says.

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

Some debt settlement companies may not be able to settle the type or amount of debt you have. When considering a debt relief company’s requirements, look for:

Some debt settlement companies will only deal with certain types of unsecured debt, such as credit card debt or medical bills. Many do not offer services for student loan debt.

Companies typically have minimum amounts of debt that they will negotiate, and some have minimum amounts required per account.

Look for a company that charges the lowest fee percentage. However, keep in mind that some companies charge a percentage on your total debt, while others charge based on the total debt reduced.

Debt relief companies should be accredited. Verify that a company is accredited by the American Fair Credit Council or the International Association of Professional Debt Arbitrators, ideally both. These organizations require members to meet certain standards designed to ensure protection for consumers.

Unscrupulous debt relief companies may make big promises, such as suggesting that debt settlement won’t hurt your credit score or that they can keep debt collectors from calling you or lenders from suing you. The reality is debt settlement can’t protect you from credit score damage, debt collectors or lawsuits, and a good debt settlement company will be transparent about these facts. It’s a good idea to check each firm’s website for disclosures on the effects of debt settlement on your credit score.

Customer experiences can tell you a lot about what you can expect from a debt settlement company. Research online reviews with the Better Business Bureau and check the Consumer Financial Protection Bureau’s consumer complaint database.

There are no guarantees when it comes to debt settlement. Be wary of any company that promises otherwise. The Federal Trade Commission recommends avoiding companies that:

“Be very leery about debt settlement companies that make settlement seem like a sure thing or that charge high upfront fees,” Detweiler says. “There’s no guarantee that every one of your creditors will settle, and a debt settlement company should be realistic about your prospects based on your individual creditors.”

Because of its significant risks and drawbacks, debt settlement is not a good option for most consumers. Alternatives such as debt management, debt consolidation loans, balance transfer credit cards, bankruptcy and direct negotiation may be better choices.

Ulzheimer encourages consumers with debt to work out a debt management program with a nonprofit credit counseling organization. With a debt management program, you’ll get a plan for paying off your debt within a few years using a realistic budget.

You will continue to make monthly payments with a credit counseling program and pay your accounts in full – offering a positive effect on your credit score and avoiding default and the risk of lawsuits. The counselor may work with your creditors to reduce your interest rates, which can help you reduce the amount paid on your debt without a settlement.

Debt management plans are often a better choice than debt settlement for consumers facing overwhelming debt. It’s a good idea to try a debt management plan before resorting to debt settlement, unless the monthly payment is truly unaffordable.

With debt consolidation, you can take out a loan to combine multiple debts into a single payment, ideally with lower interest. Working with debt consolidation companies can be a more manageable option than trying to pay off multiple high-interest accounts. Debt consolidation loans can be personal loans or even home equity loans.

Debt consolidation is typically a more responsible solution for reducing debt than debt settlement. If you consolidate debt and complete payments with a debt consolidation loan, you will pay them using loan funds as a lump sum, and your accounts will be reflected as paid in full, which is better for your credit rating than settling accounts.

Balance transfer credit cards

Balance transfer credit cards allow you to transfer your credit card balance from one card to another and pay 0% interest during the promotional period. Credit card companies typically require good credit to qualify for balance transfer cards, so this might not be an option if you’ve already missed multiple payments.

Filing for bankruptcy is a drastic measure, but it can offer a fresh start. Negative payment history will stick with your credit report for years whether you file for bankruptcy or not. And bankruptcy could offer protection against creditor lawsuits, where debt settlement does not.

You don’t have to work with a debt settlement company to negotiate settlement agreements. You can talk to lenders directly to explain your situation and ask to settle your account for less than the full amount.

“There’s nothing a debt settlement company can do for you that you can’t do for yourself,” Ulzheimer says. “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.”