How Debt Relief Programs Work

When debt feels heavy and hard to manage, it can help to know you have options. Debt relief programs, sometimes called debt settlement programs, are designed to help you regain control of your finances by negotiating with creditors to get rid of your debt, often for less than your full balance.

It's possible to settle debts on your own, but that path isn't for everyone. Sometimes it's smarter—and a lot less stressful—to have an expert in your corner who can help you meet your debt relief goals. 

We’ll show you how debt relief programs work, including what kind of debts qualify and what to expect from the process, so you can decide if debt relief is the right move for your situation. 

What Is a Debt Relief Program?

A debt relief program is designed to help with the process of settling unsecured debt—debt that doesn't have collateral, or something of value backing it up. Examples of unsecured debt you could settle include credit card debt, personal loans, payday loans, or medical bills.

When you enroll in a debt relief program, expert negotiators will work with your creditors to convince them to accept less than the total you owe and forgive the rest of your debt. To save up for settlement, many people choose to stop making payments to creditors.

Instead, the money you were paying to creditors goes into a dedicated settlement account. This is an account in your name, that you own and control. In fact, federal law requires that you own the account. 

The debt relief company can help you decide how much to set aside. Once you've saved enough, the negotiators get to work. Experienced debt relief experts have relationships with many creditors and often know the best way to negotiate. 

Once they’ve reached an agreement on your behalf, you get the final say. You can choose to approve the deal—or not. If you approve the agreement, your creditors will be paid out of the escrow account. The debt relief company also gets paid from the same account.

How Debt Relief Programs Work Step by Step

Enrolling in a debt relief program doesn't require you to hand your financial future over to someone else. You're in control every step of the way. You're simply letting the experts do the heavy lifting for you.

Nothing happens without your approval. You get the final say on any settlement agreements. The debt relief company doesn't even charge a debt settlement fee until an agreement is reached, you've approved it, and at least one payment has been made to your creditor.

Learn all you need to know about how debt relief programs work with a step-by-step breakdown.

Step 1: Free debt evaluation

Reputable debt relief companies will offer a free debt evaluation to help you make sure you're a good candidate for debt relief. During your free consultation, a Debt Consultant will go over your debts and help you design an affordable program tailored to your situation.

Many people with overwhelming unsecured debt could be good candidates for a debt relief program—but it won't be the right solution for everyone. If the following conditions are true, you’re probably a candidate for debt settlement: 

• You have at least $7,500 to $10,000 in unsecured debt

• You can't afford to pay your debt in full

• You’re experiencing a financial hardship, such as job loss or serious injury

There are no credit or income requirements to join a debt relief program. However, you do need money to pay into your escrow account to use for settlement. Saving up a solid amount for a lump sum offer generally increases the chances that the creditor will agree to settlement. 

The free debt evaluation is a crucial first step to understanding what a debt relief program could look like for you. 

Step 2: Monthly program deposits

Once you enroll in a debt relief program, the next step is to start saving for settlement.

Typically, this means you stop paying your creditors while you save up. This frees up money so you can save for settlement faster than you could otherwise manage. Stopping payments will also help show your creditors that you're experiencing hardship and can't afford your debts.

Keep in mind that missed payments will likely hurt your credit scores. Payment history is the biggest credit scoring factor, so the impact could be significant. If you're already behind on your debts, however, then more missed payments may not have as much impact on your scores.

Your debt relief company will help you decide how much you should pay each month into your dedicated account. Often, it’s lower than the total combined minimum payments you were making on your debt. This money will wait in the account, which you own and control, until the time comes to use it to settle your debt. 

Step 3: Creditor negotiations

Negotiating with creditors is a key part of a debt relief program. Expert negotiators will work with your creditors to come to an agreement on how much you should pay. 

The experienced negotiators who work for the debt relief company understand how creditors evaluate settlement offers. They may know creditors from working with them on past settlement deals. They can communicate directly with your creditors to make negotiations faster and easier. 

This is where you'll generally see the full benefit of enrolling in a debt relief program. You can focus on your life—including getting past whatever financial hardship you're facing—while the negotiators work behind the scenes on your behalf.

Step 4: Settlement approval

Once creditors have agreed to a plan, the debt relief company presents it to you so you can review the settlement plan and ask questions. You're in total control here. Next steps won't happen until you've had time to consider the agreement and approve it (or not).

If you approve the agreement, your creditor will be paid the agreed-upon amount from your dedicated account. The debt relief company then collects its fee from the same account used to repay your creditor.

Once the creditor has received the payment—or final payment, if it's not a single lump sum—the remaining debt balance is forgiven. You're now finished with that debt, though you may have to think about it again at tax time.

The IRS considers forgiven debt to be income. Unless you're insolvent, you'll likely need to pay income tax on any forgiven debt. Consult with a tax professional to see how forgiven debt could impact your tax liability.

Step 5: Program completion

If you have multiple enrolled debts, you'll get back to saving and negotiators will work through each remaining debt. Once all the debts have been resolved, the program is complete.

Many clients settle their first debt within just a few months. This could be a major burden off your plate. Depending on how much total enrolled debt you have, you may be in your debt relief program for two to four years.

Once the debt is gone, you can start rebuilding. You won't have that debt hanging over your head or holding you back. You can start improving your credit score and accomplishing other financial goals.

What Types of Debt Qualify for a Debt Relief Program?

Generally, only unsecured debt qualifies for enrollment in a debt relief program. This includes:

• Credit card debt

• Personal loans

• Medical bills

• Department store credit cards

• Private student loans

Secured debt, or debt that’s backed by collateral, generally can't be settled. That's because the collateral guarantees the debt. In other words, if you default on a mortgage loan, the lender could take your house and sell it to repay the loan if you don't pay. Or if you have a car loan, the lender could repossess your car and sell it. 

Since lenders have a way to get their money back, there’s usually no reason for them to settle a secured debt. One exception may be if you've already been foreclosed on and your lender is trying to collect on a deficiency judgment, that could qualify for debt settlement. 

Some private student loans may be eligible to be settled. However, federal student loans don't qualify for a debt settlement program. You'll need to pursue other options, like income-driven repayment plans or a type of loan forgiveness. 

What to Consider Before Enrolling in a Debt Relief Program

Enrolling in a debt relief program won't solve all your problems or magically make your debts disappear. It's also not an overnight fix for unmanageable debt. Consider these points:

• Missing payments to creditors will negatively impact your credit scores. 

• Collectors may continue collections activities and may even take legal action. 

• Forgiven debt could be subject to income tax unless you’re insolvent.

• It could take two to four years to settle all of your enrolled debts.

• Settlement fees could be 15% to 25% of your enrolled debt.

For most people, the downsides are outweighed by the relief of getting rid of overwhelming debt. Once your debts have been settled, you have the chance to rebuild and improve your credit. A tax professional can also help you plan for the tax implications.  

And if creditors do pursue legal action on an enrolled debt, Freedom Debt Relief may engage a Legal Partner Network attorney to attempt a settlement at no extra cost for qualifying clients who have made their deposits on time.

So, while you need to plan for these issues, ultimately you may find the downsides are worth it when you're able to resolve your debt and become debt-free faster and for less money than slogging away making minimum payments.

Signs of a Reputable Debt Relief Company

Finding the right debt relief company is important so you have a trusted partner to help you overcome your debts. 

To find a reputable debt relief company:

• Look for debt relief companies that offer free consultations with no obligation. They should be transparent about the process and fees. Avoid any company not willing to answer questions.

• Confirm that the company is licensed to operate in your state. 

• Check whether the company is accredited by the Better Business Bureau. 

• Read reviews on Trustpilot and similar sites to find out if the debt relief company has received positive feedback. 

• Make sure the Debt Consultants or experts have proper credentials and certifications. For example, you can look for IAPDA certification.

• Watch out for companies charging upfront debt settlement fees. Legitimate debt relief companies don’t charge settlement fees in advance, and it’s illegal to do so. 

• Review the company's frequently asked questions to learn more details about how it works.