What Is Debt Relief? How It Works and Who It’s Actually For

Debt relief is a broad term used to describe programs that help people reduce or manage overwhelming debt, but not all debt relief options work the same way, and some come with serious trade-offs.

In general, debt relief involves working with a lender or third party to make your debt more manageable, either by lowering payments, reducing interest, or settling balances for less than you owe. Some options are low-cost and credit-friendly, while others (like debt settlement) can significantly damage your credit and carry legal and tax risks.

This guide explains what debt relief really means, how different programs work, and how to decide which option, if any, makes sense for your situation.

Table of Contents

1. What is debt relief?
2. How do debt relief programs work?
3. Types
   1. Nonprofit
   2. Lender hardship programs
   3. Debt settlement
   4. Bankruptcy
4. When debt relief makes sense
5. How debt settlement works (a closer look)
6. Pros and cons
7. Is settlement right for you?
8. How to choose a reputable debt relief company
9. FAQ

What is debt relief?

Debt relief is a broad term to describe programs and strategies that help make overwhelming debt more manageable. Instead of paying debts exactly as originally agreed, debt relief typically involves modifying repayment terms, reducing interest, or, in some cases, settling balances for less than you owe.

Importantly, debt relief is not a single program. It can range from low-cost, credit-friendly options such as nonprofit credit counseling to more aggressive approaches like debt settlement or bankruptcy.

The right option depends on your financial situation, how far behind you are on payments, and whether you’re trying to prevent or recover from a financial crisis.

How do debt relief programs work?

Debt relief programs work by changing how you repay your debt, rather than relying on do-it-yourself payoff strategies like the debt snowball or avalanche.

Depending on the option, a debt relief program may:

• Lower your interest rate or monthly payment
• Pause payments temporarily through hardship programs
• Consolidate payments into a structured plan
• Negotiate with creditors to reduce balances
• Discharge certain debts through the legal system

Some programs help you stay current on payments, while others involve falling behind intentionally to negotiate relief. That difference matters, and it’s why debt relief isn’t appropriate for every situation.

Types of debt relief options

Not all debt relief options work the same way, and the risks for each type are different.

Below are the most common types, starting with the least risky.

Nonprofit credit counseling and debt management plans

Nonprofit credit counseling agencies (we like ACCC’s approach the best) offer free or low-cost counseling to help you understand your options. If appropriate, they may recommend a debt management plan (DMP).

With a DMP:

• You repay your full balance (not less)
• The agency negotiates lower interest rates or waived fees
• You make one monthly payment to the agency, which pays creditors

This option is often the best first step for people who can still afford payments but need them to be more manageable.

Lender hardship programs

Many lenders offer hardship programs directly, especially if you’re experiencing temporary financial stress.

These may include:

• Temporary forbearance
• Reduced interest rates
• Modified repayment plans

There’s no cost to ask, and these programs typically have less impact on your credit than third-party debt relief options.

Debt settlement

Debt settlement involves negotiating with creditors to accept less than the full balance owed, usually after you’ve fallen behind on payments. This approach is also called strategic default.

This approach can significantly reduce debt, but it also:

• Damages your credit score
• Can trigger taxes on forgiven debt
• Comes with a risk of lawsuits

Debt settlement is generally best reserved for severe financial hardship when other options are no longer realistic.

Bankruptcy

Bankruptcy is a legal process that can discharge or restructure debt under court supervision.

• Chapter 7 may eliminate qualifying debts quickly but can require asset liquidation
• Chapter 13 sets up a three- to five-year repayment plan

Bankruptcy has a major credit impact, but for some people, it’s the fastest and most reliable way to reset financially.

When debt relief makes sense (and when it doesn’t)

Debt relief via a for-profit company (aka debt settlement) may make sense if:

• You’re already behind on payments or close to default
• Your debt payments are no longer sustainable
• You’ve exhausted budgeting, negotiation, and consolidation options
• Bankruptcy feels like a real possibility

Debt settlement may not be a good fit if:

• You can still afford minimum payments
• Your credit score is strong and needed for near-term goals
• Your hardship is temporary and short-lived

Choosing the wrong option or choosing too early can cause more harm than good.

How debt settlement works (a closer look)

Debt settlement follows a structured but high-risk process:

1. You enroll eligible unsecured debts, such as credit cards
2. You stop making payments, allowing accounts to become delinquent
3. You save monthly into a dedicated account for settlements
4. The company negotiates with creditors after balances age
5. You approve settlement offers before any money is paid
6. Funds are disbursed, fees are collected, and remaining balances are forgiven
7. You may owe taxes on forgiven debt reported via Form 1099-C

Not all creditors agree to settle, and not all debts are resolved successfully.

Pros and cons of debt settlement

Pros

• Can reduce total debt owed

• May help avoid bankruptcy

• Provides negotiation support if you’re overwhelmed

Cons

• Significant credit score damage

• Fees typically range from 15% to 25% of enrolled debt

• Forgiven debt may be taxable

• Creditors may sue while accounts are in default

• Not all debts or creditors are eligible

Debt settlement can damage your credit score because it affects the two most important scoring factors: payment history and credit utilization. Recovering can take years.

Before choosing this option, consider whether you’ll need good credit for major goals, such as buying a home or financing a car, within the next five to seven years. If so, debt settlement may limit your options. If you don’t anticipate needing credit during that time, the long-term impact may be more manageable.

Debt settlement is high-risk, high-consequence. It’s only appropriate in certain situations.

Is debt settlement right for you?

Debt settlement may be worth considering if:

• Your credit score is already low (e.g., between 300 and 579)
• You’re behind on multiple accounts
• You’ve ruled out nonprofit counseling and hardship programs
• You have stable income to fund settlement offers
• You understand and accept the risks

If you need good credit in the next couple of years, this option may create more problems than it solves.

For most people seeking debt relief, I recommend starting with low-cost or free options. Unbiased support, such as nonprofit credit counseling or lender hardship programs, can help manage debt without damaging your credit or exposing you to risks like lawsuits or wasted fees.

Contacting lenders directly is also a no-cost way to explore relief options. Debt settlement and bankruptcy are typically last resorts; they carry significant consequences, and most people don’t meet the criteria where those options are truly necessary.

How to choose a reputable debt relief company

If debt settlement is the right path, choosing the right company matters.

Look for companies that:

• Clearly explain fees, timelines, and risks
• Don’t charge upfront fees
• Let you approve settlements before payment
• Have a long operating history and strong reviews

Check out our resource on the best debt relief companies, which includes these three providers:

Our pick for debt settlement: National Debt Relief

At LendEDU, National Debt Relief is our top pick for debt settlement, not because debt settlement is ideal, but because it executes this high-risk strategy more responsibly than most competitors.

National Debt Relief stands out for:

• Transparent fee structures and expectations
• Dedicated account managers
• A long track record of negotiated settlements
• Clear communication about credit impact and risks

No debt settlement company can eliminate the downsides, but if you pursue this option, working with an established provider like National Debt Relief can reduce surprises and improve outcomes. Read our full review of National Debt Relief to find out all about its business model.

FAQ

How much does debt relief cost?

Debt relief costs vary depending on the type of program and your total debt amount. If you’re working with a debt settlement company, you’ll typically pay 15% to 25% of the total debt enrolled, but fees are only charged after a settlement is reached. For example, if you enroll $20,000 in debt and settle it for $12,000, your fee might be $3,000 to $5,000, bringing your total repayment to between $15,000 and $17,000.

Debt management plans through nonprofit credit counseling agencies usually involve setup fees of $25 to $75 and monthly fees of $25 to $75. These fees are regulated by state laws and may be waived for financial hardship.

What happens if a debt relief company can’t negotiate my debt down further?

If a debt relief company is unable to reduce your debt significantly, a few outcomes are possible:

• You may still owe the full balance and must resume or continue making payments.
• The company may close the account and refund unused funds, minus any administrative or setup fees.
• You might be referred to alternative options, such as bankruptcy or debt management.

Be sure to read the service agreement closely; some companies may have a satisfaction guarantee or a refund policy if they don’t achieve certain results.

How is a debt settlement plan different from a debt management plan?

A debt settlement plan involves negotiating with creditors to pay less than what you owe, often in a lump sum or structured payments after a period of nonpayment. It can reduce your total debt but hurt your credit, and it may trigger tax liability on forgiven amounts.

A DMP is a structured repayment plan in which you repay your full debt amount over three to five years, often with lower interest rates or waived fees. DMPs are generally coordinated through nonprofit credit counseling agencies, and you continue making monthly payments, which may have a more neutral or even positive impact on your credit over time.