Is Debt Settlement a Good Idea? Here's What Dave Ramsey Thinks

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  • Debt settlement may seem like an attractive option if you're struggling to pay the bills.
  • Settlements are negotiated with lenders.
  • Dave Ramsey has provided some helpful advice on debt settlement.

Don't consider settling your debt before reading this.

If you are having a hard time paying your debts, you may be interested in pursuing debt settlement

Settling debt, or coming to a negotiated agreement with your credit card issuers or other lenders to pay back less than you owe, may seem like the solution to your problems. But there are actually some big downsides to consider as well as a few upsides to this approach.

To help you make an informed choice about whether to go ahead with settling debt, it's a good idea to consider some advice from finance expert Dave Ramsey. 

Here's what Dave Ramsey has to say about debt settlement 

On the Ramsey Solutions blog, Dave defines debt settlement as a situation "when a company negotiates with your creditors to pay them less than the total balance you owe."  

You can do this negotiating yourselfand settle debtwithout working with a company that you have to pay, but many people who settle debt do work with a professional as Ramsey suggests.

While paying less than you owe would indeed help you become debt free more quickly and with less financial sacrifice, Ramsey is definitely not in favor of this approach. As the Ramsey Solutions blog explains, debt settlement can take a very long time to complete, which means you'll have your debt hanging over your head the entire time.

And if you do work with a company to help negotiate the settlement with your creditors, it can be very expensive to pay their fees. In fact, Ramsey warns that you could pay between 15% to 25% of the total amount you are settling to the company that arranged the agreement with your creditors. "Say you owe $20,000 in consumer debt. That means you could pay an additional $3,000 to $5,000 just to settle," Ramsey warned. 

And these are not even the worst disadvantages of settling debt. "You only qualify if you have a history of missing payments," Ramsey explains. All of these missed payments will do serious long-term damage to your credit score that can make it much harder to borrow in the future. While Ramsey is anti-debt and may not view this future difficulty securing a loan as a downside, the reality is that your credit score is used for lots of things including renting an apartment or getting a cell phone -- and you don't want to ruin your credit if you can help it. 

Should you listen to Dave Ramsey?

Ramsey is right about the big downsides of debt settlement. Damaged credit and expensive fees can make the process not worth it.

However, if you truly cannot repay what you owe even with making sacrifices, cutting your budget, or taking on a side job, then settlement can be a better approach than bankruptcy. If you decide to move forward with this approach, you may want to consider talking with creditors yourself to try to reach a deal to make a lump sum payment for less than you owe, rather than paying a company thousands to do it for you.

Before you settle debt, though, consider alternatives such as refinancing or balance transfers -- neither of which would damage your credit and both of which could also help make debt payoff easier and cheaper over time.

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