The Definitive Guide to Debt Relief

Everything you need to know about debt relief programs.

Check how much money debt relief can save you.

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As of November 2018, Americans had nearly $4 billion in outstanding debt, equaling roughly one-fourth of the nation’s collective income. On a personal level, the average American has about $38,000 of debt.

Personal debt of the average American.

While this high burden of personal debt causes concern among economists, some debt can be helpful. But when it goes from manageable to out-of-control, serious problems arise.

The good news, however, is that debt relief programs exist and can help you climb your way back to financial well-being if you find yourself falling down a slippery slope.

This in-depth guide will cover everything you need to know about debt relief programs, including:

Let’s get started.

What is a debt relief program?

Debt relief can mean different things depending on the context. However, a debt relief program usually refers to a debt settlement program in which a firm helps a debtor negotiate and settle their debt(s). Instead of paying creditors, the debtor sends their money to the agency, which deposits it into a bank account with a third party. In the meantime, the person’s debt remains unpaid, and the penalties and interest grow.

Once the savings account reaches an amount that is large enough (as determined by the firm), negotiations on behalf of the debtor begin in an attempt to settle the debt(s). Creditors often settle for less than is owed, because they are afraid they will get nothing if they do not agree to the lower settlement.

How much does it cost to join a debt relief program?

Debt relief program fees range, on average between $1,500 and $3,500. It depends on how much you owe as the fee amount is usually calculated by charging a percentage of the debt enrolled in the program.

Debtors do not pay until after the debt is settled. After looking at several of the leading debt settlement agencies in the U.S., the average fee hovers around 19% of the enrolled debt amount. So, if you enroll $10,000, you can expect to pay around $1,900 in fees.

How much does a debt relief program cost? How much can you save?

When it comes to savings, clients can reduce their debt by about 32%, on average. Given that the fees average around 19% of the total enrolled debt amount, these programs could be expected to reduce your debt by about 13% overall.

Using the above example, if you enrolled $10,000 into a debt relief program, you would save $3,200, pay $1,900 in fees, and end up saving $1,300 overall. Of course,  you also have to factor in the impact on your income tax.

What are the tax implications of debt relief programs?

It can be a great relief when your debt is settled. However, your troubles are not completely over until you pay Uncle Sam. If your debt is reduced by $600 or more, the reduced amount is considered taxable income.

From the example above, if the debt settlement company saved you $3,200 in debt, you would have to pay taxes on that amount. In 2019, you would owe somewhere between $320 and $1,184, depending on your tax bracket. Your final savings would range between $116 and $980.

When does a debt relief program make sense?

Debt settlement programs make sense when you are tired of struggling with your debt alone and are ready for professional help. For example, if you haven’t been able to save money, can’t catch up on your payments, and don’t foresee that changing, then these programs can provide a significant benefit.

By enrolling, you can get on a path that will likely end in relief. Further, you can put a firm in charge of negotiations, which can grant you some peace of mind.

However, you will have to accept that your credit score will likely drop, the net savings might not be huge, and settlements aren’t guaranteed. Further, creditors can still pursue you and take legal action as long as your debts are outstanding. But it can be worth it to finally resolve your debt. Here’s an overview of the pros and cons.


Here is a list of the benefits and the drawbacks to consider when looking into debt relief

  • Potentially settle debt for less than you owe
  • Get professional assistance to get out of debt
  • Hand off the responsibility of debt negotiations with creditors
  • Don’t pay anything upfront
  • Collectors can still pursue you until the debt is settled
  • Settlements are not guaranteed
  • You have to pay the agency
  • The process negatively affects your credit score
  • You have to pay income taxes on forgiven debts that exceed $600
  • Net savings may not be substantial

What are the alternatives to a debt relief program?

Not sold on a debt settlement program? Here are other debt relief options to consider.

ProgramDebt Management ProgramDebt ConsolidationChapter 7 BankruptcyChapter 13 BankruptcyTax Debt Relief


Non-profit credit agencies create plans to help debtors pay off unsecured debt in full through monthly payments, often with reduced rates and fees. The monthly payment is distributed amongst the debtor’s creditors.The debtor takes out a loan or line of credit large enough to pay off their smaller debts. It’s ideal for the debtor to find a lower cumulative interest rate than they are currently paying.A legal proceeding where a person’s non-exempt assets are liquidated by a trustee in order to pay off their secured and unsecured debts. Eligible debts which can not be paid by assets are erased.A legal proceeding where the debtor agrees to pay their creditors most, if not all, of what is owed (secured and unsecured debts) through a payment plan. A trustee administers the payment plan on the debtor’s behalf.Tax debt relief companies present your case to the IRS on your behalf and negotiate a settlement solution (payment plan, offer in compromise, uncollectible status, etc.)


A small monthly fee plus monthly payments toward the debt.The principal balance plus interest on the new loan and any applicable fees including, but not limited to, origination fees, and balance transfer fees.Around $335 for filing plus attorney costs and assets which are liquidated.Around $300 for filing plus attorney costs and monthly payments toward the plan.The cost can vary greatly from $500 to $3,000 any beyond depending on your tax situation.


3 to 5 yearsLoan terms can vary greatly from 2 to 30 years.4 to 6 months3 to 5 yearsNA


Regular payments can help credit scores to increase. Debtors can repay everything they owe and get free credit counseling.Potentially lower a debtor’s cumulative interest rate, ease debt management, and lower their monthly payments.If the debtor has few assets, they won’t lose much and can have their debt erased. Forgiven debt is not considered taxable income. The debtor can begin rebuilding in a relatively short amount of time.Debt that is not repaid by the end of the completed plan will be discharged and, if so, will not be taxable. Ch. 13 is often looked on more favorably than Ch. 7 bankruptcy.Enlist professional help to protect your best interests when settling tax debt. Potentially save money and time.


Credit card accounts are closed which can hurt credit scores initially. Many people don’t complete the plans. Missing a payment can kick the debtor out of the plan. These plans are only for unsecured debts.Extending the loan period can end up costing more in the long run. Also, the debtor will have to get approved for a loan or line of credit large enough to cover their debts which may not be possible.Bankruptcy stays on a debtor’s record for 10 years. The debtor has to undergo credit counseling and a money management course. The debtor must qualify which requires an income under federal limits.Remains on a debtor’s credit report for seven years and can make it difficult to get approved for new credit. Requires the debtor to undergo money management classes and credit counseling.You have to pay for the service which you is possible to perform on your own. It’s important to carefully vet firms to ensure they run fair practices.

More information

Learn more about debt management programsEverything you need to know about debt consolidationLearn more about Ch. 7 BankruptcyCh. 13 Bankruptcy — When does it make sense?Learn more about tax debt relief firms

However, if debt relief sounds like the right fit for you, here is how to compare firms.

Tips on finding the best debt relief company.

When looking at debt relief firms, ask the following questions:

Do they have minimum and maximum limits on the amount of debt you can enroll?

Most companies require you to have a minimum amount of debt, which ranges from $500 to $10,000. Some will also have a maximum amount of debt you can enroll, such as $100,000. You will need to find a company with requirements that match your needs.

How long is the typical turnaround time to settle your debt?

Debt relief programs take time as you need to save up enough money to make substantial offers. On average, two to four years is reasonable. Check with several firms to find out their estimated time frames. If they are too short or too long, you should be suspicious.

What fees do they charge?

Debt relief firms charge a percentage of the debt you enroll, which can range from 10% all the way up to 60%. The amount will vary depending on the state in which you live and the company you choose. Look for a competitive cost as it will be the key factor in your net savings.

What types of debt are accepted?

Not all debts are eligible for debt relief programs, so find out which types of debt each company accepts. Do they only accept unsecured personal debts like those from credit cards, lines of credit, medical bills, and personal loans? Do they accept business debts? How about student loans, tax debts, or secured debts? Look for a firm that will accept the debts you need to enroll, or as many of them as possible. In most cases, secured debt will not be accepted.

Have past customers filed complaints against the company?

In 2010, many regulations were put in place to protect consumers in their dealings with debt settlement companies. To check if a specific firm has complaints filed against it, contact your State Attorney General and local consumer protection agency. They can also help you find out if the firm is required to be licensed in your state.

What accreditation does the company hold?

Several institutions offer accreditation to debt relief firms, which helps to give them more credibility. Look for accreditation by the American Fair Credit Council (AFCC), United States Organizations for Bankruptcy Alternatives (USOBA), and the International Association of Professional Debt Arbitrators (IAPDA).

Does the debt relief company provide any helpful tools?

Some debt relief companies do more than just provide the basic services, they also try to support your journey by providing you with tools and resources. These can include budget planning worksheets, blogs, guides, ebooks, debt relief calculators, etc. Compare various companies to see what tools they provide.

How is the customer service?

Customer service will become important if you ever have any questions or concerns. It is important to find out ahead of time about the level and quality of support provided by a company. You can do so by researching the support channels they offer (phone, email, live chat, etc.) and by reading reviews from past customers.

Do they provide the required information about the program?

According to the U.S. Federal Trade Commission, debt relief companies must disclose the following before any client signs up for its services:

  • The negative consequences you will likely experience by not paying your creditors
  • The amount you must save for each outstanding debt before the firm will begin negotiations with your creditors
  • The estimated time frame to make offers and settle your debts
  • The fees and conditions of its services
  • You can withdraw your money at any time without paying any penalties.
  • You are entitled to any interest yields on your money while it is in the savings account.
  • The funds you deposit are put into a bank account administered by an independent third party, and the debt relief company cannot receive referral fees.

If a company fails to communicate any of this, they are not abiding by federal law, and this should be reason for concern. As with any industry, there are bad actors and it pays to be vigilant.

Ready to start a debt relief plan?

Debt relief isn’t right for every situation. It’s important to know and understand all of your options. However, sometimes it is the best and last resort. If you want to speak with a top-quality debt relief firm, you can review and compare debt relief firms here to find the best fit for you.