How Does Debt Relief Actually Work?

By Staff MONEY RESEARCH COLLECTIVE

Updated March 5, 2026 7:02 AM

How Does Debt Relief Actually Work — Getty Images

SPONSORED CONTENT is content paid for by a partner. The McClatchy Commerce Content team, which is independent from our newsroom, oversees this content.

Money Research Collective’s editorial team solely created this content. Opinions are their own, but compensation and in-depth research determine where and how companies may appear. Many featured companies advertise with us. How we make money.

With the high cost of housing, groceries and other basics, people are increasingly relying on debt to cover their expenses.According to Experian, one of the major credit bureaus, consumers had an average of $104,755 of debt in June 2025. That figure reflects total consumer debt, including mortgages, auto loans and credit cards. Experian also reports average credit card debt of $6,735.

If your debt has gotten out of control and you feel like you’ll never be able to repay it, debt relief, also called debt settlement or debt negotiation, can be appealing. This article focuses on debt settlement (also called debt relief).Through debt relief programs, you may be able to repay only a portion of the total you owe and ultimately eliminate your debt.

What to know about debt settlement

Debt settlement generally applies to unsecured debt (like credit cards, medical bills and personal loans), not mortgages or auto loans. Most federal student loans typically aren’t eligible for settlement through these programs.
Many debt settlement strategies involve stopping payments to creditors for a period of time, which can hurt your credit and increase the risk of collections activity or a lawsuit.
Debt relief companies generally can’t collect fees until a settlement is reached under a signed agreement and you’ve made at least one payment under that agreement.
You may also pay setup or monthly fees for the dedicated account used to hold settlement funds.

When Does Debt Relief Make Sense?

Debt relief is a process where you negotiate with your creditors to pay off, or “settle,” your accounts by paying less than you owe — often as a lump sum. For example, if you owe $10,000, you might offer to pay a lump sum of $6,000, and the creditor agrees to the reduced amount and closes the account. They forgive the remainder and consider the debt settled. Some creditors may also agree to a short payment plan as part of a settlement.

You can handle debt settlement on your own, but it can be a complex process, and working with a professional debt relief company can be a good idea.

Debt settlement companies work on your behalf to negotiate with your creditors and come to an agreement to reduce what you owe. This approach can make sense in the following scenarios:

You’re experiencing a financial hardship like job loss, divorce or a medical emergency
You are struggling to keep up — or have fallen behind — with your minimum monthly payments
You’re contemplating declaring bankruptcy
Your debt is severe enough you cannot pay it off within a few years
The amount you owe is ballooning due to high interest charges on the revolving debt
You have the ability to make a lump sum payment, or are willing to save up to do so.

Debt settlement may be a poor fit if you’re current on payments and can pay the debt down in a reasonable time, if most of what you owe is secured debt, or if you want to avoid major credit-score damage. Consider alternatives such as a nonprofit credit counseling agency’s debt management plan (DMP), a consolidation loan or bankruptcy advice from a qualified professional, depending on your situation.

Industry research commissioned by the debt relief trade group found that, for accounts settled in 2022, the average settlement amount was about 50.7% of the debt at enrollment. After accounting for fees, average savings to the debtor were about 31.9% of enrolled debt, and average fees were about 16.8% of enrolled debt.

The American Association for Debt Resolution (AADR) said that people who participate in debt settlement programs typically slash their debt by about 50%. The median savings per household was $19,620 per household in 2023.

How Debt Relief Works

Debt settlement, whether you opt for a do-it-yourself approach or involve a professional debt relief company, involves the following steps:

1. Decide between a do-it-yourself approach or working with a company

You can settle your debt on your own; you have the option of contacting your creditors and offering a lump sum payment as a settlement. However, debt settlement requires extensive negotiation, and for those who are uncomfortable with high-pressure discussions or who don’t have the time to handle it themselves, using a debt relief company could be a good alternative.

Debt settlement companies are skilled in negotiating with creditors, and they often have established relationships with major financial institutions, making it easier for them to reach a resolution.

2. Research your options

Although debt settlement is possible nationwide, state laws and industry availability vary. As a result of state laws or regulations, debt relief services were described as “not widely available” in the following states in a 2023 industry-commissioned report: Connecticut, Georgia, Hawaii, Illinois, Iowa, Kansas, Maine, New Hampshire, New Jersey, North Dakota, Ohio, Oregon, Rhode Island, South Carolina, Vermont, Washington, West Virginia, and Wyoming.

To find reputable providers, check the Association for Consumer Debt Relief (ACDR) accredited member list and confirm a company meets any state licensing or registration requirements.

When comparing your options, pay attention to the cost. Fees vary by debt relief company, but they usually range between 15% and 25% (depending on the state you live in) of the debt you include (or “enroll”) in a debt relief program. You may also pay separate fees to the company that administers the dedicated account used to hold your settlement funds.

3. Find out if you meet the criteria for debt relief

To qualify for a debt settlement program, you usually have to meet certain eligibility requirements. Specifics vary by company, but you usually need to meet the following criteria:

You have at least $7,500 in unsecured debt
You have eligible debt (unsecured debt, such as credit cards and personal loans, qualify for debt settlement. Secured debt and most federal student loans do not).
You have a reliable source of income.
You can demonstrate a significant financial hardship that is making it difficult or impossible to make your minimum payments.

4. Meet with the provider

Next, you’ll meet with the provider or speak with a representative over the phone. The representative will review your debt, discuss the debt relief company’s fees and structure, and explain the process to you.

The company will work with you to obtain details about your financial accounts and will give you disclosures and agreements to review and sign. Typically, debt settlement involves pausing any creditor payments, as companies aren’t likely to negotiate unless your accounts are delinquent.

Be aware that stopping payments can lead to late fees, added interest, collections activity, negative information on your credit report and the risk of being sued.

5. Make consistent payments into the designated account

Once the process is complete, the provider will work with you to open a new dedicated savings account — this is a bank account set up for the purposes of building up funds for negotiations. Based on your income, expenses and timeline, the debt relief company will calculate a monthly deposit amount. While the debt relief company will help you determine the size of your deposits, you’re ultimately in charge of making them and retain control of the account.

Federal rules mandate that dedicated accounts used for debt relief programs must be maintained at an insured financial institution and that you own the funds in the account. Once you’ve saved enough to make a credible offer on at least one account, the debt relief agency will contact your creditors to begin negotiating settlements.

6. Approve your settlement agreements

The debt relief provider will contact your creditors and negotiate a settlement with each one separately. If a creditor agrees to the proposed terms, the debt relief company will contact you with the settlement terms. You’ll have to approve the settlement agreement; many debt relief companies allow you to do this via text, with a mobile app or through an online dashboard. The money you accumulated in the dedicated account will be used to pay your creditors and settle the accounts. Note that this is the stage where you pay the fees to the provider; by law, debt relief companies cannot charge you for their services until they’ve successfully negotiated a settlement for you, you have approved the terms and the creditor has been paid.

Issues to Consider

Debt settlement can be a useful tool to help some people work toward a debt-free future, but there are some serious repercussions to consider:

Taxes:When you settle your debt for less than you owe, the discharged amount may be taxable as income, so you could owe a substantial amount on the settled debt. If a creditor cancels $600 or more, you may receive Form 1099-C. Some people can exclude canceled debt in situations such as bankruptcy or insolvency, which may involve filing Form 982 — consider talking with a tax professional.
Credit Impact: When you pursue debt settlement, you stop making payments to your creditors to build leverage to negotiate. Those missed payments will be reported to the credit bureaus, hurting your credit score. Accounts that were delinquent typically appear on your credit report for seven years.
Cost: The cost of debt settlement can be as much as 25% of your enrolled debt, which will offset the savings you gain from reducing the amount you owe. You may also face dedicated-account administration fees.
Results: Debt settlement results aren’t guaranteed. Some creditors refuse to negotiate with debt relief companies, so you may accrue interest and late charges without successfully settling your debt. While the companies cannot guarantee they’ll be successful in getting a creditor to settle, you can ask what happens if a creditor won’t negotiate, what dedicated-account fees apply and how the company calculates its fee.

Frequently asked questions about debt settlement

How long does debt settlement take?

Timelines vary. ACDR says most clients receive their first settlement within 4–6 months, but completing all settlements can take longer depending on how much you can save and how creditors respond.

Can a creditor sue me if I stop paying?

It’s possible. The CFPB warns that stopping payments can trigger collections activity and increase lawsuit risk.

Will debt settlement stop interest and fees?

Not necessarily. Interest and late fees can continue to accrue until a settlement is reached, which can increase what you owe before it’s resolved.

Will forgiven debt affect my taxes?

It can. The IRS explains that canceled debt may be taxable, with exclusions in certain cases (including bankruptcy or insolvency) that may involve Form 982.

Can a debt settlement company charge upfront fees?

Federal rules bar collecting advance fees until a settlement is reached under a signed agreement and you’ve made at least one payment under that agreement.

Before enrolling in debt settlement, explore other options for managing your debt. By learning about other ways to get out of debt faster, you may be able to take back control of your finances without needing to turn to debt settlement. If you’re unsure, consider getting advice from a reputable nonprofit credit counselor or a qualified bankruptcy attorney before you stop paying creditors.

This story was originally published February 26, 2025 at 8:35 AM.