The four kinds of debt relief
| Option | What happens | Typical cost | Credit impact |
|---|---|---|---|
| Hardship program | Your card issuer temporarily lowers your rate, waives fees or pauses payments | Usually none | Card may be frozen or closed |
| Debt management plan | Nonprofit counselor negotiates lower rates; you repay in full over 3–5 years | About $35–$40 to enroll, $25–$31 a month | Enrolled cards closed; on-time payments help |
| Debt settlement | A company negotiates to pay creditors less than you owe, usually after you stop paying | 15%–25% of enrolled debt, plus possible taxes | Missed payments; settled accounts stay 7 years |
| Bankruptcy | Court discharges qualifying debts (Chapter 7) or sets a 3–5 year repayment plan (Chapter 13) | Court and attorney fees | On report 7–10 years |
Source: NerdWallet, Experian, CFPB. Checked October 2026.
The first two keep you paying what you owe on better terms. The last two reduce or erase debt, at a much higher cost to your credit.
How debt settlement works
You enroll debts such as credit cards. Instead of paying creditors, you deposit money each month into a dedicated account. Once enough builds up, the company offers a creditor a lump sum to close the debt for less. Programs often last two to four years, and companies commonly require at least $5,000 to $10,000 of debt.
The CFPB lists the risks plainly. While you aren’t paying, late fees and penalty interest pile up, collection calls continue, and creditors can sue you. Some creditors refuse to negotiate with settlement companies at all. If only some debts settle, the penalties on the others can wipe out the savings.
The fee rules
Since October 2010, the FTC’s Telemarketing Sales Rule has barred debt relief companies that sell by phone from collecting fees in advance. According to the CFPB, a company can charge only after it has settled at least one debt, you have agreed to the settlement and you have made at least one payment under it. The money you set aside must sit in an account you control at an independent institution. Regulators have sued firms that broke these rules: the CFPB’s 2019 settlement with Freedom Debt Relief included $20 million in restitution, and in 2024 the CFPB and seven states sued Strategic Financial Solutions, alleging more than $100 million in illegal advance fees.
Taxes on forgiven debt
The IRS generally treats canceled debt as ordinary income. A creditor that forgives part of a balance may send you Form 1099-C. You may be able to exclude it if you were insolvent, meaning your total debts exceeded the fair market value of your assets just before the cancellation, or if the debt was discharged in bankruptcy. Excluding it requires filing Form 982.
How to decide
- Temporary setback, accounts still current: call your issuers about hardship programs before you miss a payment, and get any agreement in writing.
- Steady income but rates too high to make progress: a debt management plan or debt consolidation lets you repay in full at a lower rate.
- Can’t repay in full within about five years: compare settlement with bankruptcy. Chapter 7 can erase most credit card, medical and unsecured personal loan debt in about six months. Before filing, you must complete credit counseling with a U.S. Trustee-approved agency within 180 days.
Our debt relief companies guide lists named settlement firms’ published fees, debt minimums and the states they serve.
Common mistakes
- Paying anything up front. The CFPB calls advance fees a red flag. So are guarantees, promises to cut your debt by a set percentage, claims of a “new government program,” and advice to stop talking to your creditors.
- Ignoring the tax bill. On a $10,000 forgiven balance, a 12% federal bracket means about $1,200 in tax unless an exclusion applies.
- Skipping the free options. A counselor can tell you whether you need settlement at all.
Free and low-cost help
Nonprofit credit counseling agencies accredited by the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA) offer budget reviews, often free, and can explain every option above. If you’re weighing bankruptcy, the required pre-filing counseling must come from an agency on the U.S. Trustee Program’s approved list. If you want to tackle debt on your own, start with our guide to paying off credit card debt. You can file a complaint about a debt relief company with the CFPB at consumerfinance.gov/complaint or (855) 411-2372.
Guides in this section
Frequently asked questions
What is the difference between debt settlement and debt consolidation?
Consolidation replaces your debts with one new loan or plan and you repay the full balance. Settlement tries to get creditors to accept less than you owe, usually after you stop paying, which damages your credit and can lead to fees, lawsuits and taxes.
Can a debt relief company charge me before it settles my debt?
No, if it sells its services by phone. Under the FTC's Telemarketing Sales Rule it can charge only after it settles at least one debt, you agree to the settlement and you make at least one payment under it.
Is forgiven debt taxable?
Generally yes. The IRS treats canceled debt as ordinary income and the creditor may send Form 1099-C. You may be able to exclude it if you were insolvent or the debt was discharged in bankruptcy, using Form 982.
How does debt settlement affect my credit?
Missed payments are reported once you are 30 days late, and settled accounts stay on your credit reports for seven years. Chapter 7 bankruptcy can stay up to 10 years and Chapter 13 for seven.
Where can I get free debt advice?
Nonprofit credit counselors accredited by the NFCC or the Financial Counseling Association of America offer free or low-cost budget reviews and debt management plans. You can also ask your card issuers about hardship programs.
Sources
- CFPB – What is a debt settlement and how does it work?
- CFPB – Credit counseling vs. debt settlement, consolidation or credit repair
- FTC – Enforcement policy statement on the debt relief amendments to the Telemarketing Sales Rule
- IRS – Topic 431, Canceled debt: is it taxable or not?
- Taxpayer Advocate Service – Cancellation of debt
- U.S. Bankruptcy Court, S.D. Indiana – Credit counseling requirement
- CFPB – Freedom Debt Relief payments to harmed consumers
- CFPB – CFPB and seven state attorneys general sue Strategic Financial Solutions
- NerdWallet – How does debt settlement work?
- NerdWallet – How to find debt relief
- NerdWallet – How does debt management work?
- Experian – What is a credit card hardship program?
Rates, fees and terms change often. Figures were checked in October 2026; confirm current details with the provider before you apply.