14 Pros and Cons of Debt Relief Programs

Debt relief programs attempt to settle or negotiate your debts with creditors you owe. These companies attract many customers because they negotiate on your behalf and help reduce the legwork you’d otherwise do yourself.

This method of getting out of debt can be risky—and expensive. It could leave your credit score and finances on life support. We’ll break down in more detail several debt relief program pros and cons below:

Pros	Cons
Potential debt reduction	Damaged credit
Third-party negotiation	Increased debt
Structured plan	Fees
Lower stress	Lawsuits
Alternative to bankruptcy	Taxes
Professionals on staff	Not all creditors participate
Can help borrowers with few options	Impact on future opportunities

✅ Debt reduction

You can find out everything you need to know about debt relief and these programs in our resource on debt relief, but the ideal outcome for someone seeking help from these companies is to reduce their debt.

If creditors settle for 30% to 60% of the original debt, a $100,000 debt could shrink to between $30,000 and $60,000, depending on the settlement terms.

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✅ Hands-off negotiation

Debt relief programs can communicate with creditors on your behalf. This is a huge break for individuals facing mounting debt who may find collection agency calls and creditor letters in the mail stressful and overwhelming.

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✅ Structured repayment plan

Debt relief programs often create a structured repayment timeline, which can streamline the process and make the repayment plan clear. For those overwhelmed by scattered bills and deadlines, this structure can help them regain control over their finances.

✅ Lower stress and emotional relief

Dealing with debt collectors can be super stressful. However, enrolling in a debt relief program often reduces harassment from creditors, which can alleviate emotional strain and improve mental well-being.

✅ Avoid bankruptcy

Debt relief programs can be an alternative to bankruptcy, helping borrowers resolve their debts without the long-term financial and legal consequences of filing for bankruptcy.

✅ Professional expertise

Debt relief companies often have experienced negotiators and financial professionals who understand creditor tactics. They can use their expertise to secure better terms than individuals might achieve on their own.

✅ Debt resolution for those with limited options

For individuals who have exhausted other financial resources, such as refinancing or debt consolidation, debt relief programs can provide a viable path forward when other options aren’t feasible.

The most common misconceptions I’ve seen clients have about debt relief programs are not realizing the impact on their credit and not understanding that the forgiven debt will be taxed as income.
Erin Kinkade, CFP®

✖️ Damaged credit

Debt relief companies often negotiate with creditors after advising their customers to stop making payments. A negotiator must show creditors that the borrower can’t make payments or that it’s a financial burden.

However, creditors may report missed payments to the credit bureaus, which can decrease your score, push you into default or delinquency, and remain on your report for seven years or more.

Alternatives that won’t damage your credit: Refinance your loans. If the interest rates are lower than your original debt, you could save on monthly payments and interest over the life of the loan.

✖️ Increased debt

By not making payments, you’ll fall behind, digging yourself into a deeper debt hole. Creditors might also increase your interest rate and assess late fees, which pile up until your debt is repaid.

Now, the debt relief company could succeed in reducing your debt, including interest and fees. But debt relief programs don’t guarantee results—so you could end up with more debt than you started with.

Alternatives that won’t increase your debt: Debt consolidation. These personal loans can also be an effective way to combine multiple debts into one—ideally at lower interest rates than your current loans.

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✖️ Fees

One of the main ways a debt relief company makes money is by charging settlement fees—typically between 15% and 25% of the original amount. So if you settle $100,000 of debt, for instance, you’d owe the debt relief company between $15,000 and $25,000 for its help.

Many debt relief companies also charge monthly fees that are added to your payment.

Fee-free alternatives: Nonprofit organizations. You might qualify for assistance from a nonprofit credit counseling agency.

✖️ Lawsuits

Creditors have the right to sue for an unpaid debt that’s late––often referred to as in default or delinquent. While they often resort to less aggressive means first—sending letters, for instance—your creditors could take you to court if you’re evasive or uncooperative.

It usually takes several months before a creditor will sue. But there’s no universal timetable for how long a creditor must wait to pursue a debt you owe.

Alternatives that won’t get you in legal trouble: Debt snowball or debt avalanche method. Start a monthly spending plan that lists your income and expenses, including debt. Then, use what’s left to pay off each debt one by one.

Debt snowball: Pay any extra money toward your smallest debt amount and then roll the minimum payment and the extra payments you were making into the next-smallest debt after you’ve paid off the first one.
Debt avalanche: Put any extra money into the debt with the highest interest and then roll the minimum payment and the extra payments you were making into the debt with the second-highest interest, and so on.

✖️ Taxes

The IRS considers canceled debt of $600 or more taxable income. It will be clear whether your agreement produces taxable income if you receive a 1099-C from a creditor.

If your canceled debt is significant enough, this additional “income” could push you into a higher tax bracket—meaning you’ll owe higher taxes.

Alternatives you won’t pay taxes on: Home equity loan or line of credit (HELOC). If you’re a homeowner, these products allow homeowners with at least 20% equity to borrow against that amount.

✖️ Limited creditor participation

Not all creditors are willing to work with debt relief programs. So, some of your debts may remain unresolved, leaving you to manage them separately while still paying fees to the debt relief company for the accounts it settles.

Alternatives that can apply to any creditor: Negotiate directly with companies. Some creditors may be more willing to work with you than through a third-party debt relief program. By contacting your creditors personally, you can explain your financial hardship and propose alternative repayment terms, such as lowering your interest rate, waiving late fees, or setting up a customized payment plan

✖️ Impact on future financial opportunities

Even after resolving your debts, late payments or settlements leave negative marks on your credit report, which can make it harder to qualify for future loans, credit cards, or even rental housing. Creditors may view you as a higher-risk borrower for years.

Alternatives to help your credit score: Credit builder loans. This option lets you make payments on a loan and get the funds as a lump sum afterward, reporting your on-time payments to the credit bureaus each month. (This is best for those with damaged credit.)

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A nontraditional alternative method a client could use is simply asking a trusted family member (or friend) who is in a strong financial condition to pay off the debt.

A promissory note outlining the repayment terms and associated consequences of lapses can be created between the two parties privately or drafted by an attorney (recommended)
Erin Kinkade, CFP®