Deforestation is a matter of serious global concern. Establishing protected areas (PAs), which cover nearly 15% of the world’s surface, is one of the leading approaches to forest conservation. The recent global expansion of PAs has led to the inclusion of local communities in the forest management process, an approach referred to as “co-management.” PAs under co-management are expected to conserve biodiversity while providing support to local communities. This trend for forest co-management has shown mixed results, and a better understanding of its impact on forests and people is required. This study attempts to explore the forest-cover change in a PA of Bangladesh—the Teknaf Wildlife Sanctuary (TWS). Remote sensing will be used to assess the land-cover change, followed by a household survey to define the impact of local settlements responsible for this change. To analyze the impact of PA and co-management on forest cover, satellite images from 1989, 2007, 2009, and 2015 were considered due to the availability of quality images. The study found that from 1989 to 2015, the region saw a 46% decrease in forest cover compared to 64% inside the PA boundary; deforestation occurred more inside the PA than outside. Moreover, after the implementation of a co-management approach, the rate of deforestation increased inside the PA. Besides the forest conversion, the tree coverage shifted from the core forest area toward the settlement area, causing serious negative impacts on biodiversity. The household survey listed 57,404 households in the region, among which 5195 were situated inside the PA. Co-management in PAs was intended to involve local communities in forest management, but this study showed that the local community is causing more deforestation and shifting the tree coverage towards the forest boundaries. The creation of a large, multi-use buffer zone to ensure the long-term tenure of the core forest area could be a viable option. Such buffer zones can provide effective security and enhance local people’s livelihoods.