Today's high prices probably aren't going away — and neither is the debt that many people have accrued because of them. Even as inflation cools compared to last year, the cost of essentials like housing, groceries and insurance remains stubbornly high. For many Americans, that's translated into stretched budgets, along with bigger credit card balances, more personal loans and a growing sense of financial anxiety.

At the same time, interest rates on borrowing products, like loans and credit cards, are still elevated, which makes it harder to dig out once you've fallen behind. For example, the  average credit card rate is closing in on 22% right now, and many cardholders are stuck with much higher rates. And, with delinquencies on the rise across multiple types of consumer debt, more borrowers are starting to ask the hard question: What do I do if I just can't afford to pay it all back?

One potential answer is debt settlement, which is a strategy that allows you to negotiate with your creditors to pay less than what you owe. But while it can offer relief, it also comes with serious trade-offs, so it's important to know what you're getting into before you enroll.

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Debt settlement 101: What it is and how it works

Here's a closer look at how debt settlement works, when it makes sense and what to consider before going down this path.

What is debt settlement?

Debt settlement is a process where you negotiate with your creditors to pay less than the full amount you owe. It typically applies to unsecured debts — like credit cards, medical bills or personal loans — and is often used as a last resort when a borrower can't afford to pay off their debt in full.

Unlike debt consolidation, which combines your debts into one manageable loan, debt settlement is focused on reducing your balances outright. The goal is to settle for a lump-sum payment that's less than what you owe, often by working with a professional debt relief company.

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How the debt settlement process works

The typical debt settlement process takes a few years and looks something like this:

• You stop making payments to your creditors. Instead, you start setting aside money in a dedicated, FDIC-insured bank account.
• Over time, this money builds up while your accounts fall into delinquency. This is part of the strategy, as most creditors won't negotiate a settlement for less than what you owe unless you're already delinquent.
• The debt relief company negotiates with your creditors on your behalf to reduce your balances. If a creditor agrees, you'll be asked to also approve the agreement, and money from your dedicated account is used to pay the settled amount.
• Once the debt is settled, the account is marked as "settled" or "paid for less than the full amount" on your credit report.

The entire process typically takes 24 to 48 months on average, depending on how much debt you have and how much you're able to save.

Who is debt settlement for?

Debt settlement is usually best suited for people who:

• Have at least $7,500 to $10,000 or more in unsecured debt
• Are already behind on payments (or are about to fall behind)
• Can't realistically pay off their debt in full, even with a reduced interest rate
• Are willing to accept a hit to their credit

That said, debt settlement is generally not a good fit if you have mostly secured debts like a mortgage or auto loan, or if you're keeping up with your payments and just looking for a more affordable solution. In those cases, credit counseling or consolidation may be a better route.

Benefits of debt settlement

Debt settlement can offer real advantages — especially for borrowers who have exhausted other options. Here are some of the key benefits:

• You could pay significantly less than what you owe. In successful cases, creditors generally agree to accept 30% to 50% less than the original balance (before fees) on average — and in certain cases, they may accept even less. That can equate to thousands of dollars in forgiven debt.
• You could avoid bankruptcy. Debt settlement may be a less damaging alternative for those on the brink of filing for Chapter 7 or Chapter 13 bankruptcy. It allows you to resolve your debts without the long-term consequences bankruptcy can have on your credit and financial future.
• It offers a faster path to resolution. Debt settlement typically takes two to four years, which expedites the process compared to slowly chipping away at minimum payments for years (or decades). Once the settlement is paid and finalized, the debt is considered resolved.
• You make one monthly deposit rather than juggling multiple bills. When working with a debt settlement company, you'll make a single monthly deposit into a dedicated account. This can be easier to manage than juggling multiple minimum payments across various debts.

Just remember that these benefits only apply when the process goes well and you stay committed to your program by making deposits into your dedicated account.

Debt settlement risks and consequences to consider

Debt settlement can offer significant savings, but it's not without its downsides, which include:

• Credit damage: Because the process involves stopping payments, your credit score will typically decrease. Accounts marked as "settled" can also be treated negatively until the account ages and falls off your credit report.
• Fees: Most debt relief companies charge fees of between 15% to 25% of the enrolled debt.
• No guarantees: Creditors are not obligated to settle. Some may refuse or even escalate collections or lawsuits.
• Tax consequences: The IRS may consider forgiven debt as taxable income. So, if you settle a $10,000 debt for $4,000, the $6,000 forgiven may be reported as income.

Still, for people overwhelmed by debt and without other realistic options, these risks may be worth it for the chance to resolve what they owe and start fresh.

The bottom line

Debt settlement isn't a quick fix or a perfect solution, but for some borrowers, it can be a way to avoid bankruptcy and dig out of overwhelming debt. If you're considering debt settlement, though, you should also be sure to weigh your other options first, like credit counseling or even negotiating directly with creditors. And, if you do decide to go this route, it's important to work with a reputable company, stay informed and make sure the potential benefits outweigh the trade-offs.