Debt relief programs like debt settlement often require making every single payment on time to settle all of your accounts. And for many, the benefit of paying less makes it worth the effort. Be prepared to spend three to five years working with a debt relief company to see results.
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Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.
What is debt relief, and is it legit?
Debt relief encompasses a wide scope of services, from negotiations with your creditors to debt management tools.
Some debt relief companies help you manage your current debt and budget repayments in an affordable way. Others, like debt settlement companies, negotiate with your creditors to reduce the amount you owe. For this to work, you may need to stop paying your creditors altogether.
Before you stop making payments, your debt settlement company should lay out all risks, including potential lawsuits.
In most cases, debt relief is legit. But you should avoid signing up with a company that doesn’t meet federal requirements or doesn’t provide much information on its website.
However, debt relief companies don’t focus on your tax debt, so if you need help negotiating your tax debt, you’ll need to compare the best tax relief companies.
Interested? Watch our short guide, where we explain how you can qualify for debt relief and how much it may cost.
How will it affect my credit?
Credit counseling and debt management will have little to no impact on your credit score — but debt settlement or negotiation will.
If your company tells you to stop paying your creditors, you may face a lower credit score, more collection calls and a lawsuit once your debt is sold to collections.
If a lawsuit is successful, a debt collection agency may be able to garnish your wages for the amount owed, which could throw a wrench in the debt relief process.
Carefully consider the potential downsides to debt relief before signing up for a program.
Pros and cons of debt relief
Expert advice from debt professionals
Potentially reduce interest or total debt
Lower your monthly debt payments
Debt settlement programs have a low 10% completion rate
Forgiven debt considered taxable income
Creditors may pursue legal action for missed payments
5 types of debt relief programs
Debt relief doesn’t necessarily mean debt settlement. There are other ways to tackle your debt — although you’ll likely have to pay a fee for any option you find.
Credit counseling. Credit counselors help people in their community learn more about managing their finances. Check if your bank or credit union offers credit counseling or browse a list of credit counselors managed by the Department of Justice.
Debt management. This involves negotiating with your creditors and creating a plan to pay off your debts.
Debt settlement. Similar to debt management, a debt settlement company negotiates on your behalf. It pays your creditor, and then you pay back the debt settlement company in low monthly payments over three to five years.
Debt consolidation. Debt consolidation is a good choice for smaller amounts of debt — provided you have good to excellent credit. Consolidating your payments makes debt easier to manage, and you may even be able to score a lower APR and pay less interest.
Bankruptcy. Bankruptcy should be your last choice. It stays on your credit for seven to 10 years and can significantly impact your ability to get a loan or credit card — even when that loan is for your business. However, it eliminates a large majority of your debt with no payment plan.
Are debt relief and debt consolidation the same thing?
Generally, debt relief refers to debt settlement or debt management, but debt consolidation can be a form of debt relief.
Debt consolidation is typically only available to people with good to excellent credit because it involves borrowing a new loan to pay off all your debts at once. This consolidates your payments and could potentially lower them — if you can score a lower average interest rate.
Debt settlement involves working with a company that will negotiate with your creditors on your behalf. The goal is to pay off your debt for less than you owe. However, most debt settlement companies charge a high fee and require you to stop paying your creditors, which could put you at risk of a lawsuit.
Debt consolidation vs. debt settlement
Debt consolidation and debt settlement are different ways to handle your debt — and have very different impacts to your credit.
What happens to debt
Same amount consolidated into one monthly payment
Potentially lowers total debt
Cost
APR between 3.99% to 35.99%
Fees depend on amount of debt enrolled or settled
Credit requirements
Good to excellent credit required
None, but proof of hardship preferred
Credit impact
Hard credit check may temporarily lower score
Missing payments to creditors will cause a negative impact to your credit
Collateral
Unsecured and secured options available
None required
What to look for in a debt relief company
Consider the following factors when comparing debt relief companies:
Accreditation. Most legit debt relief companies are accredited with either the American Fair Credit Council (AFCC) or the International Association of Professional Debt Arbitrators (IAPDA).
Not banned from debt relief. Because there are scams in the debt relief world, you should check the FTC list of companies and people banned from debt relief before you sign up for any program.
Transparency. If you can’t find vital information like how much debt relief costs, how fees are calculated and how long the company has been in business, consider working with another provider.
Costs. Debt relief companies often charge a fee for either a percentage of the total amount of debt you have or the amount they’re able to reduce your debt by. Most credit counseling services are free, though some may charge a small fee depending on your state.
Direct or indirect negotiation. If you pick a debt settlement company, ensure it negotiates with your creditors directly. Indirect negotiation is uncommon and may put your information at risk when it transfers between companies.
Eligibility. Many companies have restrictions on your total debt balance, types of debt and where you live. And some debt relief companies are geared toward different credit scores and income ranges.
Customer reviews. Online review sites like the Better Business Bureau and Trustpilot are a good place to look out for red flags and learn what you can expect from a debt relief company.
8 steps to make the most of your debt relief program
These steps can help you make an informed decision when you choose a debt repayment strategy.
Take stock of everything you owe. Add up your total unsecured debts. Generally, you need at least $7,500 in debt to qualify for a debt relief program.
Review your credit score and budget. Check your credit score using a free service online. You’ll have the most options available if you have a FICO score above 670. Then calculate your monthly cash flow by subtracting your expenses from your income. What’s remaining is what you can afford to spend on debt relief.
Compare all your options. If you have good credit, positive cash flow and owe less than half of what you make in a year, a debt consolidation loan can be a good choice. But hiring a debt relief company to negotiate down your balance in exchange for a one-time payment may be a good option for higher debt loads.
Meet with a credit counselor. Nonprofit credit counseling agencies often offer free sessions to people who want professional advice on how to start. In a typical session, you’ll go over your finances and come up with a debt repayment plan.
Understand the full cost. One of the top complaints about debt settlement is that it’s more expensive than expected. You can adjust your expectations by going in knowing how much you’ll owe on your accounts by the end of the program and being prepared to pay taxes.
Play it safe. Don’t make any major career or life decisions that can impact your finances while you’re in debt relief. Changes to your income can make it difficult to keep up with your monthly payments toward your creditors and settlement fund.
Make payments on time, every time. Missing a payment toward your debt relief program can cancel your contract.
Don’t take on more debt. Most debt relief programs tell customers to stop using their credit cards while they’re enrolled. And with a debt load high enough to qualify for debt relief, you likely won’t be able to qualify for a new credit card or personal loan.
While debt settlement can be helpful for a lot of people, know what you’ll have to pay before you get started.
Fees aren’t based only on your initial debt. Fees depend on your total debt and are hard to predict. It depends on how quickly your debts are settled, how interest accumulates, if you continue payments, whether you have late fees and more.
Debt settlement counts as income. Any settled debt of more than $600 is considered taxable income. After taxes, you could end up saving only 10% — or less.
But there’s a tax loophole: You might be exempt if your tax liabilities are greater than your assets at the time of the settlement. Talk with a tax specialist before enrolling in a debt settlement program to learn how this exemption might affect you.
Beware of debt relief scams
While most debt relief companies are legit, there are scams out there. It’s easier to find a legit credit counseling agency than any other type of debt relief company — they’re mostly nonprofit, and the Department of Justice has already done most of the work for you by compiling a government-approved list of credit counselors.
4 signs of a debt relief scam
It should set off alarm bells if you see a company committing any of these offenses:
It charges upfront fees for its services.
It guarantees a specific amount of debt savings.
It promises it can settle lawsuits and stop calls from collection agencies.
It advertises itself as a new government program that can erase your debt.
It also pays to be aware of your state laws. Ensure that any debt relief company or attorney you’re working with holds the appropriate licenses and follows state regulations.
Student loan debt relief scams
The most recent government crackdown has focused on student loan debt relief scams — one reason why most legit debt relief companies won’t touch student loans. Watch out for any offers that try to get you to sign up for a new program fast, customer service reps that ask for your login information and anyone who claims to be a representative from the Department of Education. And check out our guide to avoiding student loan debt relief scams for more tips on what to look out for.
10 myths about debt relief
My debt will eventually drop off my credit report, so why should I pay it off? While a default only stays on your credit report for seven years, creditors — or more likely, collections agencies — will still demand you pay off your account.
Filing for bankruptcy is better than debt relief. Filing for bankruptcy will stay on your credit report for seven to 10 years, making it difficult to qualify for financing in the future. With debt relief, you have a better chance of keeping your credit score above water.
All debt relief companies are scams. You can make sure you aren’t signing up for a scam by checking the Federal Trade Commission’s list of companies and people banned from debt relief.
I can’t settle debts on my own. Anyone can pick up the phone and negotiate down the debt on their own. But debt settlement companies are seasoned negotiators and already have established relationships with creditors.
Debt relief programs will take forever. Debt relief programs usually take between two and four years to complete. How long it takes depends on how quickly you can save up the funds to pay off your account — and how willing your creditors are to settle.
Few people actually have their debts settled. On average, 74% of people successfully settle at least one account through a debt settlement program, according to a January 2021 report by the Harvard Kennedy School.
Debt relief companies charge fees up front. It’s now illegal for any debt settlement company to charge fees up front, thanks to a 2010 amendment to the Telemarketing Sales Rule.
I can’t get out of debt if it was already sold to a debt collector. If you reach out and propose a payment plan or a settlement, they might accept. It’s their job to collect on your debt, after all. It’s only after you receive a default judgment that negotiating gets tricky.
Debt settlement companies can guarantee to settle my debts. It’s illegal for debt settlement companies to guarantee that they’ll settle all or any percentage of your debts, according to the Telemarketing Sales Rule.
Debt relief automatically helps my credit score. Debt settlement can improve your credit score — if you’re able to complete the program without defaulting on any of your accounts.
Debt relief for taxes
There are several ways to negotiate your tax payment by working directly with the IRS. Here are a few options to consider:
Apply for a payment agreement. This agreement allows you to pay off your tax debt over time, with long-term and short-term payment plans available. The IRS typically debits a set amount from your bank account every month until your total due is paid off.
Submit an offer in compromise. An offer in compromise (OIC) agreement between the taxpayer and the IRS settles the amount for less than what is owed. If you can’t pay your full tax liability, you might be eligible for a debt reduction under an OIC.
Request currently not collectible (CNC) status. If you can’t pay your tax debt after paying your living expenses, you might be able to apply for “currently not collectible” status. CNC status temporarily halts collection efforts from the IRS.
Request an extension. You might be eligible for a time extension if you would experience undue hardship by paying off the debt on time. If approved, you can gain an additional six months to pay off your taxes owed or up to 18 months to pay off a tax deficiency.
Alternatively, take out a personal loan to pay off your tax debt if you need to break it into more manageable installments.
How bankruptcy works
Bankruptcy is a legal process that works by wiping out some or all of your debt, depending on the type of bankruptcy you file for. The court also might assign a new repayment plan with different terms to pay off your debt.
Chapter 7. Also known as liquidation bankruptcy, Chapter 7 bankruptcy wipes out all of your debt by selling off your possessions and using the proceeds to pay off your creditors. This option is only available if you pass a “means test,” which demonstrates you don’t make enough money to pay off the debt and that it interferes with your personal relationships.
Chapter 11. Also known as the reorganization chapter, Chapter 11 bankruptcy works by allowing businesses and individuals to come up with a modified payment plan rather than selling off their belongings. With filing fees alone clocking in at $1,167, it’s the most expensive type of bankruptcy available to individuals.
Chapter 13. Also called the wage-earner’s plan, Chapter 13 allows you to pay off your debts in installments over three to five years. This means you won’t have to liquidate your assets — or at least not all of them. But you can’t qualify if you have unsecured debts over $394,724 and secured debts over $1,184,199.
Download forms on the US Courts website to file for bankruptcy. Bring them to a Bankruptcy Court, along with supporting documents that vary by bankruptcy type. You might also be required to undergo credit counseling before you can file.
After you file for bankruptcy, the court might seize and sell off some of your assets to cover the debts you owe. Or, it’ll help you come up with a repayment plan to cover some of your debts. Typically, the court hosts a meeting with your creditors at least once to iron out the details of your bankruptcy.
Bankruptcy and credit reports
Bankruptcy has a highly negative impact on your credit. How it affects your credit score depends on your current rating. Going bankrupt when you have excellent credit can knock your score down by over 100 points. But if you already have poor credit, it might not make a significant change.
In addition to your credit score, bankruptcy stays on your credit report for several years. So even if you do manage to rebuild your credit quickly, this could still disqualify you from many types of financing — even some short-term loans.
Chapters 7 and 11 stay on your credit report for up to 10 years.
Chapter 13 stays on your credit report for up to 7 years.
Debt relief alternatives
Handle your debt on your own with determination and a manageable budget.
Repayment strategies. While it won’t result in a reduction to the amount you owe, you can adopt a repayment strategy like the debt avalanche or snowball methods to build your budget and pay off your debts in manageable chunks.
DIY negotiations. Debt management and debt settlement companies negotiate on your behalf, but you can reach out to your creditors on your own. Explain your situation and see if you can lower the amount you owe or modify your repayment schedule.
Answers to commonly asked questions about debt and debt relief.
Is there a statute of limitations on debt?
Yes, there is usually a statute of limitations on debt. In the most basic terms, the statute of limitations on debt is an expiration date. Once a certain number of years have passed, creditors and debt collectors can no longer legally sue you for payment.
The time period differs between states but usually ranges from 3 to 10 years, with an average of six years. It typically starts on the account’s last date of activity — which is usually the date of your first missed payment.
Unfortunately, reaching the statute of limitations doesn’t erase the debt. The only way to do that is to pay it, get it canceled or have it discharged via bankruptcy. Otherwise, the unpaid debt remains on your credit reports for seven years, impacting your overall credit score.
And while creditors can no longer sue you for payment, they can file a lawsuit to dispute the date of the debt or argue that the statute of limitations doesn’t apply.
What debt relief programs does the government offer?
The government itself doesn’t offer debt relief programs, but you’ll find government-approved credit counseling agencies. Avoid any debt relief companies advertising a “new” government debt relief program — it’s a common scam tactic designed to steal your money.
How do I continue to use my credit cards after I receive debt relief?
It depends on the type of debt relief you’re participating in. Talking with a credit counseling agency shouldn’t affect your ability to use existing credit cards.
But a debt settlement or debt management program might require you to cancel your credit cards or could result in your credit card companies canceling your cards. You might be able to apply for additional cards after you’ve finished your debt relief program, but you won’t be able to use your old ones.
How can I benefit from the Mortgage Forgiveness Debt Relief Act?
If your mortgage is canceled, you might not have to pay income taxes on up to $2 million of that canceled debt, according to this 2007 law. However, not everyone can qualify. Contact a tax specialist to make sure you meet all criteria.
Anna Serio was a lead editor at Finder, specializing in consumer and business financing. A trusted lending expert and former certified commercial loan officer, Anna's written and edited more than 1,000 articles on Finder to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in publications like Business Insider, CNBC and Nasdaq, and has appeared on NBC and KADN. Anna holds an MA in Middle Eastern studies from the American University of Beirut and a BA in Creative Writing from Macaulay Honors College at Hunter College, CUNY. See full bio
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