How do debt relief companies work?

Debt relief companies can reduce or eliminate your debt, but they come with risks

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National Debt Relief and Accredited Debt Relief
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If you've maxed out all your credit cards and have a mountain of other bills stressing you out, you’re probably looking for a solution to your problem. While debt consolidation could be an option in this situation, not everyone can qualify for a loan with good rates and terms. It's also possible you have so much debt that you can’t imagine paying it off without some sort of outside help.

In this situation, you may be considering the services of a debt relief company. These companies provide a strategy called "debt settlement" that can reduce the amount of debt you owe, but these services don't provide a quick fix. There are also plenty of risks to consider before you try debt settlement, including potential damage to your credit score.

Before you work with a debt relief company to get out of debt, you should understand how these companies work, what the fees are and which debt settlement alternatives could also help you pay down debt.

Key insights

  • You’ll find debt settlement options offered through for-profit debt relief firms that typically ask clients to stop paying unsecured debts as part of the program.
  • Instead of paying creditors, debt settlement customers make payments to a designated account where funds stay until a settlement is reached.
  • While debt relief companies can ultimately help you settle your debts for less than you owe, the consequences of debt settlement can be severe and long-lasting.

What are debt relief companies?

Debt settlement services are offered through for-profit debt relief companies that exist to make money — even if they do ultimately help you resolve your debts. The potential benefit of the service is helping you "settle" your debt for less than you owe. Companies do this by asking you to set aside a specific amount of money each month that they can use to settle your unsecured debts by negotiating with creditors.

When you work with a debt settlement company, the money you save each month is set up in an escrow-like account that is designated for this purpose alone. The Federal Trade Commission (FTC) says that debt relief companies often ask you to stop making payments on your unsecured debts during the run-up to your negotiations.

Many debt relief companies claim to help you either settle your debts for less than you owe or become debt-free in as little as 12 to 48 months. However, some debt relief companies do require you to have a minimum amount of debt to use their services. For example, Accredited Debt Relief requires clients to have a minimum of $10,000 in debt, and National Debt Relief requires at least $7,500.

>>MORE: What is debt forgiveness?

Are debt relief companies legitimate?

According to Natalia Brown, the chief client operations officer at National Debt Relief, legitimate debt relief companies are always transparent about their fees and the potential outcomes of their services.

It's important to look for a company that is accredited by the Better Business Bureau and has consistently maintained a high rating. These are the signs of a company that is dedicated to providing quality services and putting their clients' needs first.”
— Natalia Brown, Chief Client Operations officer at National Debt Relief

While many debt relief companies are reputable and trustworthy, you'll need to avoid shady organizations and debt relief scams if you want results. For example, a company might make promises to settle your debt for a specific amount less than you owe or try to collect upfront fees. Others might entice you with the promise of debt relief without explaining the risks involved, including potential damage to your credit score.

There are some warning signs to watch out for as you compare debt relief companies and decide whether debt settlement is for you. For example, you should avoid companies that do any of the following:

  • Charge upfront fees
  • Advertise a new "government program" to cancel credit card debt
  • Guarantee they’ll settle a certain amount of debt
  • Don’t explain the risks of debt settlement
  • Promise to stop collection calls and lawsuits

If you find a debt relief company that appears legitimate, you'll also want to take note of whether the person you’re working with tells you everything they're required to before you sign up. For example, debt relief companies must be transparent with you about the fees they charge for services and any conditions and terms of those services. Companies also must tell you how long it will take to get the desired results and how much you need to save in the dedicated account each month to build up the savings you need.

They must also tell you that:

  • The money you save in the designated account is yours, along with any interest you earn.
  • You can withdraw the funds at any time without any penalty.
  • The administrator who runs the savings account has no affiliation with the debt settlement company.

Debt settlement firms are also required to tell you about the potential negative consequences you'll face throughout the program. For example:

  • Not making payments toward your debts while you're in the program can negatively affect your credit score.
  • Not making payments toward your debts can also lead to added late fees and more interest charges.

Other risks also come with debt settlement. For example, creditors are not required to accept a lower amount than you owe, and they may not agree to a settlement. This means you could wind up skipping payments and ruining your credit without receiving the results you want in the end.

MORE: What affects your credit score?

Pros and cons of debt relief companies

There are advantages and disadvantages that come with debt relief companies, with some of them varying based on your unique situation. Here are some of the pros and cons to keep in mind before you move forward.

Advantages of debt relief

Advantages of debt relief include the following:

  • Get the help you need: One major advantage of debt relief is having a third party working on your behalf and helping you figure out a plan. The fact is, getting help from a debt specialist can be crucial when your monthly payments become overwhelming and you don't know where else to turn.
  • Get out of debt faster: If debt settlement efforts are successful, you'll save both time and money. "If you have $30,000 in credit card or medical debt and only make minimum payments, it could take 30 years or more to pay it off — not to mention the additional financial burden of compounding interest charges," said Brown from National Debt Relief.
  • Avoid bankruptcy: Brown added that debt settlement helps consumers get some "financial breathing room" so they can avoid bankruptcy and move toward a brighter financial future. While debt settlement can negatively affect your credit, the impact of bankruptcy on your credit is worse.

Disadvantages of debt relief

There are downsides to debt relief:

  • Expensive fees: Debt settlement companies charge fees that typically fall between 15% to 25% of settled debt amounts. While you may save money by paying less on your debts than you owe, these fees will wipe away some of your gains.
  • Negative impact on credit: Not making payments on your debts can have very negative effects on your credit score. You may also accrue late fees and more interest on your debts, which can cause your total debt amount to surge.
  • Tax consequences: The IRS generally considers canceled debt a form of taxable income, so a creditor should send you a Form 1099-C for each debt settled. The FTC says you should speak with a tax professional to find out how these additional taxes could affect your situation.

Could your debt be reduced or forgiven? Take our financial relief quiz.

    Alternatives to debt relief companies

    If you’re looking for the best possible way to get out of debt, there are alternatives to debt settlement that might work better for you. Consider the following options to get out of debt and improve your financial situation over time.

    Do-it-yourself debt relief

    There are plenty of steps you can take on your own to work your way out of debt. For example, creating a budget can ensure that every dollar you earn is assigned to bills or debt repayment. You can also look at your regular expenses you may be able to cut in the future, which could help you free up more cash to use toward your debts.

    You can even call your creditors directly to ask if they’ll negotiate your interest rate or monthly payment amount. Your creditors may be willing to work with you to help you get back on track with your payments — you'll never know unless you ask.

    Credit counseling

    Most credit counseling agencies are nonprofits and offer a range of services that can help you get out of debt. For example, credit counselors may offer budget planning services, free financial counseling, money management workshops and more.

    The FTC says you can find reputable credit counseling agencies by checking each organization with your state attorney general and local consumer protection agency. It also notes that the U.S. Trustee Program keeps a list of reputable credit counseling agencies for pre-bankruptcy counseling.

    Debt management plans

    Sometimes credit counseling agencies will recommend getting on a debt management plan (DMP). In this scenario, the credit counselor will negotiate with your creditors on your behalf to get lower interest rates, waived fees and monthly payments that fit into your budget. You would then make payments into an account with the credit counseling organization each month, which is used to pay your debts on your behalf.

    The FTC points out that consumers may not be able to use credit to rack up more debts during a DMP, and that these plans can take 48 months or more from start to finish. That said, diligently following a DMP will add a long series of on-time payments to your credit history, and completing a DMP can ultimately improve your credit score.

    Debt consolidation

    With a debt consolidation loan, people with debt can go from making multiple payments each month to just one. In the meantime, they get to repay their debts with a fixed interest rate, a fixed monthly payment and a set repayment period that tells them exactly when they'll become debt-free.

    Since consumers need good or excellent credit to qualify for a debt consolidation loan with the best rates and terms, this option won't work for everyone.


    Filing for bankruptcy can also be a viable solution for consumers who have an insurmountable amount of debt to deal with. While this option can help you get out of debt once and for all, the FTC notes that bankruptcy can cause considerable damage to your credit, since it stays on your credit report for 10 years.

    With this in mind, bankruptcy is usually the last resort for consumers who have tried other debt relief options without success.


    What types of debts can be settled?

    Generally speaking, debt settlement is for unsecured debts, such as credit card debt, payday loans and medical debts.

    Is debt settlement the same as a debt management plan?

    Debt management plans (DMPs) are different from debt settlement, since these plans do not help you settle debts for less than you owe. Instead, debt management plans involve negotiating with your creditors for lower interest rates and reduced fees while you make payments into an account that goes toward repayment.

    Is there a government debt relief program?

    Some government debt relief programs exist, though they apply to a limited scope of specific debt types, like mortgages, student loans and tax debts.

    How long does debt relief stay on your credit report?

    Different debt relief actions stay on your credit report for different lengths of time. If you opt for a debt settlement program, for example, a settled account will stay on your credit report for seven years from the original delinquency date.

    Bottom line

    If you're drowning in debt and looking for a way out, debt settlement is a valid option to consider. While this strategy may help you pay less than you owe on your debts over the long run, your credit score will take a hit, and you'll pay plenty in fees along the way.

    You'll want to compare all your debt relief options before you move forward with a single strategy. While debt settlement may be the answer you're looking for, options like credit counseling, debt management plans (DMPs) and old-fashioned budgeting can also help you ditch debt and get in better financial shape.

    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Federal Trade Commission, " How To Get Out of Debt ." Accessed Feb. 11, 2023.
    2. Equifax, " How to Negotiate with Lenders ." Accessed Feb. 12, 2023.
    3. Experian, " Settled Accounts on Your Credit Report ." Accessed Feb. 12, 2023.
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