How debt relief works, and when it's not the right choice

A debt relief company negotiates with your creditors to accept less than the full balance on unsecured debts such as credit cards, personal loans and medical bills. During the program you usually stop paying creditors directly and make monthly deposits into a dedicated savings account that you own. When enough money builds up, the company negotiates a settlement and pays it from that account.

Programs often take two to four years. Most reputable companies require at least $7,500 to $10,000 in unsecured debt.

Fees are usually 15% to 25% of the enrolled debt. Under the FTC's Telemarketing Sales Rule, a debt relief company cannot charge fees before it settles at least one of your debts and you have made at least one payment on that settlement.

Forgiven debt of $600 or more may be reported to the IRS as income, unless you qualify for an exclusion such as insolvency.

• Your credit scores will likely drop, because accounts go delinquent during the program
• Creditors are not required to settle, and some may sue
• Late fees and interest can keep growing while you save
• If you leave the program early, you may owe more than when you started

Debt settlement may not fit if:

• You can afford your minimum payments and are mainly looking for a lower interest rate
• Most of your debt is secured (mortgage, auto loan) or is student loans or recent taxes
• You need to keep a good credit score soon, for example to buy a home

• Calling your creditors directly to ask for a hardship plan
• A debt management plan through a nonprofit credit counseling agency
• A debt consolidation loan or balance transfer, if your credit still allows it
• Talking to a bankruptcy attorney, if the debt is far beyond what you can repay

If you have $10,000 or more in unsecured debt and want a free review of your options, you can start with a short form.

See if debt relief fits your situation