Debt relief programs provide options for those facing financial challenges. If you're dealing with credit card obligations, you're not alone. In the second quarter of 2025, credit card debt in the U.S. hit a staggering $1.21 trillion, an increase of 5.9% compared to the previous year. If you're feeling overwhelmed, you may have considered these programs, but understanding their function can be daunting.
WHAT ARE DEBT RELIEF PROGRAMS?
Debt relief programs are services provided by companies that negotiate, settle, or alter the terms of your unsecured debt with creditors. These services are often referred to as debt settlement or debt adjusting companies.
The goal of these programs is to help you settle your debt for less than what you owe, usually through a lump-sum payment or a series of reduced payments in exchange for debt forgiveness. They can also involve debt consolidation, where multiple debts are combined into one loan, ideally with a reduced interest rate.
Additionally, many debt relief programs aim to negotiate better terms with creditors, like lower interest rates and smaller monthly payments.
IS A DEBT RELIEF PROGRAM RIGHT FOR YOU?
We suggest considering debt relief programs only if other, often more favorable, options are not viable. For instance, credit counseling could be the better solution if you're struggling but haven't missed any payments yet.
Sometimes, engaging a financial expert can make a significant difference. Take Ben Bolen, a CFP at University Investment Services, who assisted a client overwhelmed by debt. Together, they contacted each creditor to explore options for deferring or negotiating the debt. “We inquired about possible reductions,” Bolen explains. “This approach helped prevent the debts from being sent to collections, which could lead to additional fees and a damaged credit report.” With a foundation laid, they developed a manageable payment plan.
If these alternatives don’t suit your situation, and you carry significant unsecured debt (generally $7,500 or more) while being behind on payments, debt relief programs may be worth exploring.
TOP COMPANIES TO CONSIDER
While many debt settlement companies are reputable, some may exploit consumers. It's crucial to choose a company with a solid reputation.
Here are some top-rated companies, all boasting A+ ratings from the Better Business Bureau:
- Founded in 2002
- Assisted over 1 million Americans, settling more than $20 billion in debt
- A+ rating with the Better Business Bureau
- Offers low monthly payments with no upfront fees
- Free, no-obligation assessment
- Ideal for individuals with $20,000 or more in debt
- Established in 2011
- A+ rating with the Better Business Bureau
- Provides free, risk-free consultations
- No upfront enrollment fees
- Best suited for those with $20,000 or more in debt
- Founded in 2009
- No upfront fees required
- A+ rating from the Better Business Bureau
- Offers free, no-risk consultations
- Ideal for individuals with $10,000 or more in debt
POTENTIAL RISKS
Engaging in debt relief programs carries risks, particularly if you select the wrong company. The Consumer Financial Protection Bureau (CFPB) highlights several key drawbacks:
- Fees can be high, often a percentage of the debt, along with potential monthly maintenance charges.
- Some creditors may refuse to work with specific programs.
- While these programs promise significant results, they often cannot resolve all your debts.
- Most programs require you to cease payments to facilitate negotiation, which can negatively impact your credit score and may lead to lawsuits while you save for a settlement. Plus, halting credit card payments can result in accruing late fees and interest, escalating your debt further.
TAX IMPLICATIONS
According to the CFPB, there may be tax implications for any forgiven debt. If part of your debt is forgiven, it could be treated as taxable income on your federal tax return.
Before enrolling in any debt relief program, consult a tax professional to understand how forgiven debt might affect your tax situation.
FINAL THOUGHTS
Debt relief programs can offer some respite, but they come with costs and risks. Before enrolling, ensure you comprehend the fees, potential impacts on your credit, and how the program aligns with your overall financial strategy.
