Get a free, no obligation personal loan quote with rates as low as 6.99%
Get Started You can apply with no effect to your credit score
📅 Last Updated: March 1, 2024
✏️ Written By Lisa Rennie
🕵️ Fact-Checked by Caitlin Wood

Sick of getting harassed by collection agencies? Has your debt load become too much for you to handle on your own? Then you should consider speaking with a debt settlement professional. A debt settlement is a debt relief option many Canadians use to help reduce and clear their debts. 

What Is Debt Settlement?     

Debt settlement is a specific type of service with the goal of helping consumers reduce their debt. Representatives of a debt settlement company will negotiate with your creditors and lenders to come up with a settlement that works for all parties involved.  If your creditors agree to the settlement, you’ll have to provide a lump sum of cash to your debt settlement company who will then pay and settle the debts with your creditors. 

These companies often charge a fee for their services, which is typically a percentage of the amount that you saved on your settled debt. Do note, that if your debt settlement company fails to make a deal with your creditor, you’ll still have to pay a fee. 

Learn how to qualify for a debt settlement.

How Does The Debt Settlement Process Work?

When you work with a debt settlement company, you’ll have a debt settlement representative who will negotiate on your behalf with your creditors. Their goal is to try and reduce your overall debt amount to a level that’s much easier for you to pay off. 

During the negotiating process, you may be asked to stop all payments to your creditors until a settlement has been reached. This is a common tactic used by debt settlement companies to pressure creditors into accepting the debt settlement offer. However, there is no guarantee that an agreement will be arrived at. 

If the creditors agree to the amount that your debt settlement company is requesting, you will make a lump sum payment to your debt settlement company who will then pay off your creditors. 

Throughout the negotiating process, you may be required to make regular deposits into an account administered by the debt settlement company but still under your control. This account is essentially used for you to save money that will be put toward the lump sum payment to your creditors. When your creditors have been paid, your debt will be considered settled. Be sure to ask your debt settlement company these questions before working with them.

Pros and Cons of Debt Settlement

It’s important to understand that while debt settlement can help you finally rid the burden of your debt, there are some inherent risks associated with it as well. You’d be well-advised to weigh the pros and cons of debt settlement before taking this route.


  • Reduce your overall debt load
  • Put an end to harassing calls from creditors and collection agencies
  • Avoid bankruptcy
  • A fresh start


  • There’s no guarantee that a settlement will be reached
  • You may be charged with interest and late fees if you do not hold up your end of the bargain
  • There are fees associated with this service
  • Your credit score will be negatively affected

When Is Debt Settlement a Good Choice?

Like any other type of program that is designed to help you get out of debt, there are some considerations to make first. While debt settlement can certainly be helpful, it’s not necessarily for everyone. 

Here are some situations when debt settlement may be a potentially good idea for you.

  • Your debt load has grown so much that you are no longer able to manage it on your own.
  • You’ve already tried other debt-relief options that didn’t work as well as you had hoped.
  • Your main priority is reducing your debt load.
  • Your current debt load is holding you back both financially and personally.

How Does Debt Settlement Affect Your Credit?

When you settle a debt, you’ll get a remark on your credit report that says you had your debt settled, which will stay for seven years.  While this may seem like a long time a debt settlement can help minimize the negative impact you can have on your credit when you default on your loan. Instead of defaulting, a debt settlement will help you settle your debt which will: 

  • Lower Missing Payments – Rather than getting hit with multiple missed payments remarks on your credit report, a debt settlement will stop any more missed payments by settling the debt. 
  • Lower Debt-To-Income Ratio – Settling your debt will also help lower your debt-to-income ratio which can positively affect your credit. 
  • Rebuild Credit Faster – Rather than taking years to pay off your debt, you can have it settled within a few months to a year or two.  Doing so will allow you to start rebuilding your credit sooner, without having to worry about late payments bringing your credit down.

Negotiating A Settlement On Your Own Vs. Working With A Company

Of course, you’re always free to get in touch with your creditors to try and negotiate with them on your own. They may be open and willing to have a discussion with you to work something out, especially if you are able to show that you are doing everything you can to make good on your bill payments.

But sometimes it helps to have a professional do the negotiating for you. If you’re a master of negotiating, you may be successful on your own. But if you’re not, having someone else tackle the situation for you may be more helpful, especially if you enlist the help of a party that is experienced with these types of negotiations. 

Learn how to better manage your high-interest debt.

Be Cautious Of Debt Settlement Scams

Keep in mind that if you do decide to hire a debt settlement company to handle your debt settlement for you, it’s imperative that you choose a firm that is reputable and reliable. Some agencies may deal with your offer to settle informally, which often doesn’t work. 

Others may charge exorbitant fees that are completely unnecessary or may require fees to be paid upfront. Fees should only be charged after a settlement is reached. But unfortunately, some debt settlement companies are out there only to make as much money as possible.

Some debt settlement companies will lure consumers into engaging in a “government program,” which can be a misleading way to get you to pay them for a consumer proposal, which you should never have to pay for. 

The take-home point here is to ensure that you are working with a reputable debt settlement agency before enlisting one to represent you during negotiations with your creditors. 

Debt Settlement FAQs

How much of your debt can you reduce through a debt settlement? 

The amount of debt your creditors will settle for depends entirely on your financial situation, your creditors and your debt settlement’s negotiation skills. While some creditors will outright refuse any settlements others may go as low as 30% of your original debt. Most will at least settle for 50% – 70% of the original debt amount. 

Is debt settlement a bad solution for debt relief? 

A debt settlement can be a good solution for those who have enough money to make a lump sum payment to settle the debt. If you don’t it can be hard to convince your creditor to reduce your debt. Other debt relief solutions like a debt management program or a consumer proposal may be a better option. 

How long does a debt settlement stay on your credit report?

A debt settlement will stay on your credit report for 7 years and the remark will note that you settled the debt for less than what you owe. After 7 years, the remark will disappear automatically. 

How long does it take to repair your credit after a debt settlement? 

Once your debt is settled, you can start rebuilding your credit right away. The time required to rebuild credit will vary greatly depending on how well you manage your debt thereafter. Generally, you can expect it to take a year or two to bring your credit into good standing. 

Can you negotiate a debt settlement by yourself?

Yes, you can either negotiate a debt settlement yourself or hire a debt settlement company. Generally, it is recommended that you seek a professional as it can be a complicated process. Moreover, debt settlement companies usually have more experience in this field and understand how to best negotiate a debt settlement. 

Interested in Professional Debt Relief Help?

If your debt has gotten to the point where you’re no longer able to deal with it effectively, it may be time to reach out for help. Debt settlement may be one avenue to take, but there are a number of other options as well. Loans Canada can help determine which type of program may be best suited for you and help you alleviate your debt problems. 

Caitlin Wood Priyanka Correia Lisa Rennie Bryan Daly Cris Ravazzano Margaret Johnson Kale Havervold Liz Enriquez Sean Cooper Veronica Ott Corrina Murdoch Chrissy Kapralos

A Team of Experts

Get expert tips and guidance from a community of renown personal finance experts right here at Loans Canada. We're here to help you stay informed so you can make the best financial decisions.

Trusted by more than

1,500,000 Canadians

More From Our Experts
What Is The Fine Option Program?

By Lisa Rennie
Published on May 2, 2024

Do you have an expensive traffic ticket you need to pay? If you're short on cash, consider the Fine Option Program, which lets you work the fine off.
What Is Debt-To-Income Ratio And How To Calculate It?

By Lisa Rennie

Everything you need to know about what a debt-to-income ratio is and how it affects your ability to get approved for the loan you want.
How To Use Debt To Make Money

By Jessica Martel

Wondering how the rich get wealthy? Debt is often used to make money and get rich. Find out how debt is used to make money.
Debt Relief Programs In Canada: What Are Your Options?

By Jessica Martel

Debt consolidation loans, debt management programs, debt settlement, consumer proposal and bankruptcy: Find out which option is right for you.
What Is The Statute Of Limitations For Debt In Canada?

By Jessica Martel

Learn about the statute of limitations in Canada and how it can protect you from your creditors wanting to take legal action against you.
Debt Relief For Predatory Loans

By Lisa Rennie

Predatory lending is a problem many borrowers face when trying get a loan with bad credit. Here's how you can protect yourself.
Does Bankruptcy Affect My Spouse In Canada?

By Lisa Rennie

Does bankruptcy affect your spouse in Canada? Find out the implications of declaring bankruptcy when you have a spouse.
How Does A Foreclosure Affect Your Credit Score?

By Lisa Rennie

Everything you need to know about how a foreclosure will affect your credit score.

Recognized As One Of Canada's Top Growing Companies

Loans Canada, the country's original loan comparison platform, is proud to be recognized as one of Canada's fastest growing companies by The Globe and Mail!

Read More

Why choose Loans Canada?

Apply Once &
Get Multiple Offers
Save Time
And Money
Get Your Free
Credit Score
Expert Tips
And Advice

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.

Koho Prepaid Credit Card