Key takeaways

  • Debt relief can take three forms: debt settlement, consolidation and management.
  • Working with a debt management company can result in less debt or a faster payoff. However, there are often hefty fees attached to the services.
  • Working with a debt relief company often results in credit damage.

Debt relief companies are for-profit institutions that help consumers manage large amounts of delinquent debt with the aim of avoiding bankruptcy. The portfolio of relief services will vary by company, but most offer debt settlement, debt consolidation and debt management.

How debt relief companies work

Debt relief companies exist to help consumers lower their debt or better manage their repayments — for a fee. Keep in mind that these fees should never be requested upfront and should only be charged once your debts have been settled or resolved.

Most relief companies require an initial consultation to determine eligibility and to decide which method is best for you. However, it’s important to walk into the process prepared by knowing all of your options.

Debt settlement

Who it’s best for

Those who have exhausted all other relief options.

Debt settlement companies work with your creditors on your behalf to negotiate your total debt amount with the aim of reducing your repayment responsibility. These services aren’t free; you’ll be charged a fee — typically between 15 to 25 percent of your total debts enrolled — after your debts are settled.

As a customer, you’ll no longer be responsible for communicating with your creditors should the debts be settled. But you will have to make monthly payments, likely to a savings account you control, and those funds will then be sent to your creditor.

Potential risks of debt settlement:

  • Settlement requires you to stop making your payments to creditors, which will negatively affect your credit score.
  • Settled debts remain on your credit report for up to seven years and are marked as “partially paid,” which impacts your score and ability to borrow in the future.
  • Your creditors are under no legal obligation to work with a settlement company. If they refuse, you’ll have to repay the debts as well as any fees and interest incurred due to stopping your payments.

Debt consolidation

Who it’s best for

Borrowers with a steady income and good credit score (or co-signer).

Debt consolidation is the process of merging multiple accounts into one to streamline and simplify repayment, save on interest accrual and maybe even score better terms than what you have now. While you can complete this process on your own, you can also work with a third-party debt relief company if you prefer the added assistance.

You can consolidate multiple balances from loans and credit cards into a debt consolidation loan, which will come with one fixed, monthly payment. You can also consolidate multiple credit accounts into one with a balance transfer credit card. Regardless of the type of debt you have, this method won’t benefit your finances if you’re offered a higher interest rate than what you’re currently paying.

Potential risks of debt consolidation:

  • Potential upfront fees like balance transfer fees, closing costs and origination fees.
  • Unless you have a good or excellent credit score, you may not get approved or be offered a lower interest rate.
  • If you miss any payments you’ll incur more credit damage that will likely result in heavy fees, like late payment fees or an insufficient funds fee.

Debt management

Who it’s best for

Those who need a structured repayment plan.

A debt management plan (DMP) is a repayment plan for those with multiple debt balances. You’ll work with a debt relief company or credit counselor to pay down your existing debt in three to five years.

When pursuing debt management, the company or counselor you’re working with will contact your creditors directly to negotiate your loan terms and balance. You’ll make monthly payments to an account you control that will be distributed to all of your creditors.

Before choosing this relief method, make sure your overall monthly payment is less than what you were paying on your debts before starting the DMP.

Potential risks of debt management:

  • Some of your creditors may not agree to work with the company.
  • You may be asked to close all active lines of credit, which will affect your credit score.
  • Your creditor could report a DMP on your credit report. This can make it harder to get approved for credit in the future.

Advantages and disadvantages of debt relief

Like any repayment solution or plan, there are advantages and disadvantages to be aware of before working with a debt relief company. Relief companies often have more risk potential than traditional repayment methods. Thoroughly investigate the potential disadvantages before making a decision.


Here are a few positive attributes that can come from working with a debt relief company.

  • Lower amount of personal effort: Debt relief companies deal with all of the backend work for you. They will negotiate your debts and set up a repayment plan with your creditors, or can better help you manage your current balance.
  • Faster repayment: When making the minimum payments versus using a relief plan, methods like settling debts or getting a DMP can result in much faster repayment.
  • No need to file for bankruptcy: Filing for bankruptcy — whether Chapter 7 or 13 — is an expensive, often stressful process. Plus, declaring bankruptcy can result in a more severe credit impact than working with a debt relief company does.


One of the most important factors to consider when signing on the dotted line is how debt relief can impact your future. Here’s what to think about before making a decision.

  • Negative credit impact: When you begin working with a relief company, it’s often required that you stop paying your creditors, except in the case of consolidation. This will have a negative, long-term impact on your credit, even though you’re on a repayment plan.
  • No guarantee of settlement: There’s no guarantee that a creditor will agree to work with a debt relief company, and creditors are under no legal obligation to accept offers.
  • Potentially high fees: It’s typical for a settlement company to charge anywhere from 15 percent to 25 percent of your total debts enrolled. Some companies may also charge fees for things like opening and maintaining the new accounts and receiving individual assistance.

How to spot a debt relief scam

Debt relief scams can closely mimic a legitimate company, but there are a few surefire ways to detect a scam. For one, if you receive an unsolicited call or form of communication from someone claiming to be able to help you with your debt, proceed with caution. Especially if they contact you consistently.

Another way to tell if a company could be scamming you is if they ask for fees upfront. A legitimate debt relief company won’t ask for fees upfront. You should only be charged once the debts are negotiated with the creditors or once a new repayment plan is established.

Frequently asked questions

  • Yes. Debt relief companies charge fees in exchange for their services. The amount that you’re charged is dependent on the company you work with and the relief method you choose. Keep in mind that legitimate companies should never ask you to pay fees upfront; if you’re asked to provide this, it’s likely a scam.
  • Working with a relief company will typically result in an immediate negative impact on your credit score. The degree to which your score will drop is dependent on the relief method you choose and whether your creditors decide to report it.
  • In most situations, debt relief isn’t something that will be immediately good for your finances. For one, it’s often a costly undertaking due to the fees charged by the companies. It also has detrimental impacts to your credit score, lasting for a minimum for seven years on your report.But in some situations it may be the only way to avoid bankruptcy. When considering whether to pursue debt settlement, also look into credit counseling from a nonprofit agency.
  • Consumers who have a qualifying type and amount of delinquent debt generally can qualify for debt relief. However, each company has different approval and minimum debt criteria.