Debt Relief: How it Works and 4 Common Questions

What do honey badgers and debt relief programs have in common? They both have innocent-sounding names but they can be surprisingly destructive! In fairness to the honey badger, however, those little carnivores probably won’t ruin your credit or get you into a lawsuit. 

That’s right, debt relief programs can wreak a shocking amount of havoc on your finances. Despite what you may have heard or even assumed, there’s no guarantee a program will save you a single dollar on your debt. In fact, quite the opposite is true. Using a debt relief program can not only increase your debt but it can cause all kinds of other financial problems.  

If you’re considering enrolling in a debt relief program, the information below might change your mind. 

What is a debt relief program?

Debt relief programs are usually offered by for-profit, debt settlement companies who claim they can negotiate or settle your debts on your behalf. When you enroll in a debt relief program, you’ll stop paying your creditors and instead send monthly payments to the debt settlement company. 

After you’ve sent enough money to cover the anticipated settlement amount—which typically takes two to four years of payments—the company attempts to negotiate lump-sum offers with your creditors. 

How does debt relief work?

When you go on a debt relief program, you’ll have to stop sending money to your credit card and loan companies. As a result of the plan, you could potentially save some money on debt, but you’re more likely to face a long list of extreme consequences.     

Pros of working with a debt relief company 

You might save money 

If a debt settlement company is successful in negotiating with your creditors to forgive part of your balances, you might save some money. Skipping your debt payments can also create breathing room in your budget. 

Refundable payments 

If you enroll in the program over the phone, you can cancel your debt relief plan at any time and get your money back, minus the debt settlement company’s fees. 

Cons of working with a debt relief company 

Increases your debt 

When you stop paying your debt, your balances will likely increase due to late fees and penalty interest charges, and you can also incur over-limit fees. The debt settlement agency can charge fees equivalent to 15-25% of your debt, too. 

You can do it for free 

You don’t have to pay an agency to negotiate on your behalf. In fact, it’s far less risky to contact creditors and debt collectors directly and negotiate settlements on your own. 

Credit damage 

Your credit scores can suffer significant damage when you miss just one credit card or loan payment, and debt relief plans require several years of non-payment. Plus, you’ll have additional damage if/when your open debt accounts are charged off to debt collectors.    

Length of time 

It takes years of sending payments in order to reach the negotiation stage of a debt relief plan, which is why many people drop out of their plans before negotiations begin. 


The debt relief industry is rife with scams. Some states don’t require debt settlement companies to be licensed, and these companies are notorious for falsely claiming to be nonprofit credit consolidation agencies, government-affiliated, claiming to have lawyers who negotiate on your behalf or promising results they can’t deliver. 

Tax consequences 

Your income tax bill may increase after your debt settlement is negotiated since the IRS considers forgiven debt income. 

Creditors can still contact you 

Expect to get calls and letters from your creditors once you stop paying them, since they have no obligation to stop contacting you or attempting to collect payments when you’re on a debt relief plan. 

Legal risk 

Creditors may attempt to sue you for your unpaid debt, leaving you with a wage garnishment, a lien on your property or a frozen bank account. 

Nonprofit credit counselors vs. debt settlement companies: What’s the difference?  

Credit counseling is a great place to start if you’re looking for safe, affordable options for managing debt. Unlike debt settlement companies, a nonprofit credit counseling agency can give you free or low-cost help for almost any financial issue, including debt management resources, and help you address the root of the problem. 

During an appointment with a certified, nonprofit credit counselor, the counselor can help you create a budget, review your credit reports or even enroll you in a debt management plan (DMP). 

Unlike debt relief programs, DMPs are arranged with the cooperation of your creditors. When you go on a plan, your creditors may agree to significantly reduce your APR or monthly payments, and you’ll send a monthly payment to the counseling agency that they disperse to your creditors on your behalf.  

What is credit counseling? 

Credit counseling is a service that involves free professional advice and resources to help you improve your finances and credit. While credit counselors can help with several money challenges, there is a limit to what they can do. Here’s a breakdown: 

Pros of credit counseling 

Free and low cost 

While some nonprofit credit counseling agencies charge fees for their debt management plans, most of their services are free, including counseling and financial education workshops. 

Professional support 

Certified credit counselors can share knowledge and answer difficult questions on the topics of budgeting, credit and loans, debt, bankruptcy and more. 

Personalized advice 

Credit counseling is one of the only ways you can get personalized, professional advice and strategies for improving your finances based on a review of your specific budget and credit situation. 

Objective input 

Unlike many financial professionals, nonprofit credit counselors don’t sell products or receive commissions, which means they’re in a unique position to offer objective suggestions on financial products and resources. 

Debt management plans 

For those who qualify, a debt management plan from a credit counseling agency can be the key to making debt payments affordable and becoming debt free

Cons of credit counseling 

Potential fees 

If you enroll in a debt management plan, you may be charged a one-time fee to get started and a monthly fee. Fees for debt management plans vary by state and agency, but the average monthly fee is $49 with a nationwide cap of $79. 

Limited support 

Credit counselors can advise you on financial matters, but they aren’t qualified to give legal, or tax advice and they can’t guarantee specific concessions from your creditors. 

Tips for finding the right nonprofit credit counselor for your needs 

All credit counseling agencies are not created alike. Be sure to look for a nonprofit agency that has certified or accredited counselors and primarily offers free counseling without asking for donations.  

Your bank or credit union or school may provide you with complimentary access to credit counseling services or you can look up a counseling agency here: 

Debt relief and debt management aren’t the same 

Despite their similar names, debt relief and debt management are very different services. If you want to hire a company to take over your debt accounts and potentially reduce your debt, regardless of the risk involved, there’s a small chance a debt relief program is what you’re looking for. 

But if you want relief from debt, without the risk of being scammed or facing a lawsuit, try reaching out to a nonprofit credit counseling agency and asking about DMPs and other low-risk ways to pay off debt for good. 

Written by Sarah Brady | Edited by Rose Wheeler

Sarah Brady is a financial writer and speaker who’s written for Forbes Advisor, Investopedia, Experian and more. She is also a former Housing Counselor (HUD) and Certified Credit Counselor (NFCC).

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