Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Personal Finance Debt Relief What Is Debt Relief, and How Does It Work? Updated May 13, 2025 10-min read Expert Approved Expert Approved This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Rebecca Lake, CEPF® Written by Rebecca Lake, CEPF® Expertise: Student loans, mortgages, home-buying, credit, debt, personal loans, education planning, insurance, investing, small business Rebecca Lake is a certified educator in personal finance (CEPF®) and freelance writer specializing in finance. Learn more about Rebecca Lake, CEPF® Reviewed by Crystal Rau, CFP® Reviewed by Crystal Rau, CFP® Expertise: Equity compensation, oil & gas investments, education planning, investment planning, student loan planning, retirement Crystal Rau, CFP®, CRPC®, AAMS®, is a certified financial planner based out of Midland, Texas. She is the founder of Beyond Balanced Financial Planning, a fee-only registered investment advisor that helps young professionals and families balance living their ideal lives and being good stewards of their finances. Learn more about Crystal Rau, CFP® Debt relief is a broad term that describes programs or services designed to help people manage, reduce, or eliminate debt. Different types of debt relief services exist to meet different needs; options include debt settlement, debt consolidation, and relief programs for tax and business debt. How does debt relief work, and can it help with your situation? We’ll answer these questions and weigh the pros and cons. 🏡 In the News: A report from the IRS indicates that taxpayer services are not timely or adequate, with only 31% of callers reaching an assistor, frustrating people looking for assistance with their taxes or awaiting a refund. Table of Contents What is debt relief? How does debt relief work? Who should consider debt relief? Pros and cons of debt relief Alternatives to debt relief FAQ What is debt relief? Debt relief refers to strategies that help people get a better handle on their debt. For some people, that means negotiating a settlement to pay less than what’s owed. For others, it may mean consolidating debt or even filing for bankruptcy protection. The type of debt you owe and the details of your financial situation can influence the type of debt relief you seek. Debt relief can help individuals or businesses to deal with a variety of debts, including: Unsecured credit cards Medical bills Personal or business loans/lines of credit Tax debt Private student loans Debt relief exists for federal student loan borrowers through the Department of Education. Relief programs have been subject to legal challenges, which may affect the availability of student loan debt relief. Read More Your guide to emergency debt relief options How does debt relief work? The “how” of debt relief depends on which strategy you use. We’ll walk you through what you can expect if you seek debt relief through debt settlement or consolidation, or need help with tax or business debts. Debt settlement Debt settlement lets you pay off debt for less than you owe, but it comes with significant risks, including a negative impact on your credit score, potential default, and collection actions before any settlements are reached. You can settle debts yourself or work with a debt settlement company. Debt settlement is generally suitable for unsecured debts, including credit cards, medical bills, and personal loans. However, it’s important to understand that this process involves stopping payments on your debts, which can lead to accounts going into default, collection actions, and a significant drop in your credit score before any settlements are negotiated. Here’s how debt settlement companies typically work: You share information about your debts and stop making payments on them to demonstrate financial hardship, which is often a prerequisite for negotiation. If you agree to work with the settlement company, you pay a set amount of money into a secure account each month that you control. The debt settlement company negotiates with your creditors to get them to agree to a reduced amount. Creditors are generally more willing to negotiate after accounts have gone into default. If they agree, the debt settlement company uses funds from your secure account to pay the amount due. Any remaining amount due is forgiven. The process is repeated for each debt you enroll. It’s important to note that while this can reduce the total debt you owe, the negative marks on your credit report from defaulted accounts can remain for up to seven years. What happens when settlement is effective? Once a debt is settled and paid, you won’t owe anything else, but the credit report may show “settled as agreed” rather than “paid in full,” which could impact future lending decisions. The creditor may report the account to the credit bureaus as “settled as agreed” or “paid as agreed.” These marks, while better than unpaid debts, may still affect your ability to secure credit in the future. Any collection actions against you, including creditor lawsuits, would stop. Example Freedom Debt Relief helps resolve a variety of unsecured debts, including: Credit cards Retail store cards Medical debt Most personal loans Collections and repossessions Some payday loans Lines of credit Some private student loans You contribute money to an FDIC-insured account monthly. Freedom negotiates with your creditors on your behalf. When an agreement is reached, they release funds to your creditor with your approval. Throughout the process, it’s important to understand that stopping payments will negatively impact your credit score, and results can vary depending on creditor cooperation. Debt consolidation Debt consolidation combines multiple debts into one, resulting in fewer monthly payments. It can work in a few ways. Option #1: You get a debt consolidation loan and use the proceeds to pay off your other debts. You then repay the loan going forward. Option #2: You enroll in a debt management plan and make one monthly payment. The debt management company distributes your payment among your creditors. Option #3: If you just have credit card debt, you might consolidate what you owe onto a single card with a balance transfer. What are the benefits of debt consolidation? You could pay off what you owe faster, reduce the number of debt payments you make monthly, and potentially save money on interest. These companies offer help with debt consolidation:: Freedom Debt Relief Accredited Debt Relief National Debt Relief When is consolidation a better option than settlement? Consolidating debt could make more sense than settlement if you just want to make your debt more manageable. Debt consolidation doesn’t reduce what you owe; it just cuts down on the number of debts you make monthly payments on. Tax debt relief If you owe tax debt, the IRS offers several relief programs. Options include: Installment agreements Offer In Compromise (OIC) Penalty waivers An installment agreement allows you to pay off back tax debt over time; offers in compromise help you settle tax debt for less than what’s owed. You can seek tax debt relief directly from the IRS or work with a tax relief company. None of the debt relief companies mentioned above offer help with tax debt. If you’re considering using the services of a tax relief company, do your research. Ask about their services and fees to decide whether you truly need help or whether you can resolve your IRS debt yourself. Business debt relief Businesses require capital to operate, which could lead to debt if you rely on loans, lines of credit, or credit cards. Possible debt relief solutions include: Consolidating business debts with a new loan Negotiating settlements with creditors for unsecured business debts or unsecured personal loans/lines of credit you took out to fund the business Restructure business debt through a business debt relief company Reorganize business debt through a Chapter 11 bankruptcy filing What is restructuring? It means changing the terms of the debt to make it more manageable. Restructuring can work for various business debts, including lines of credit, traditional financing, and even SBA loans. With Chapter 11 bankruptcy, you can repay business debts over time and keep your assets. You also get the benefit of legal protection from creditor lawsuits. Example National Debt Relief offers help to business owners who want to settle their debt for less. A typical client pays off their debt within 24 to 48 months, and you might be able to reduce what you owe by half. National Debt Relief doesn’t charge a fee until your debt is settled. Read More Debt Relief vs. Bankruptcy: Key Differences and How to Know Which Is Best Who should consider debt relief? Debt relief can make more sense in some situations than others. You might consider seeking relief from debt if you: Are experiencing a financial hardship that prevents you from paying anything toward your debt. Have fallen behind on debt payments and your creditors are sending collection letters demanding payment. Receive a notice that you’re being sued for an unpaid debt. Have attempted to manage debt on your own but have made little or no progress and need expert solutions. Are so overwhelmed by debt that you feel paralyzed to do anything about it and actively avoid your creditors. Have found yourself wondering if bankruptcy is the only way out. Some situations require a different approach. For example, if you have the money to pay your debts but want to know how to do it more efficiently, you might talk to a credit counselor instead. A credit counselor can review your budget and help you create a workable plan to pay it down. I have only recommended debt relief when someone is experiencing financial hardship, doesn’t want to pursue bankruptcy, and has little to no other options. Crystal Rau, CFP® Crystal Rau , CFP® Pros and cons of debt relief Debt relief has advantages and disadvantages. Here are a few things to remember as you decide if it’s right for you. Pros Tailored solutions Debt relief programs are designed to meet you where you are, with solutions that fit your unique situation. Pay off debt faster Debt relief could help you pay off what you owe faster so you can focus on other financial goals. Debt settlement, for instance, typically helps you pay off debt in 24 to 48 months. Take control If creditors are hounding you or you’re stressed about what you owe, getting help from a debt relief program can put you in control Save money Debt settlement can save money if you can repay debts for less, while debt consolidation could result in a lower interest rate. Cons Tax implications Debt forgiven through a settlement agreement could be considered taxable income by the IRS. Credit score impact Creditors may not agree to settle debt unless you’re behind on payments. Late payments, missed payments, and collections can all hurt your credit. Fees Debt relief companies help people who are struggling with debt but they can charge fees for their services. Effectiveness Debt relief works best when you’re committed to following through on your plan and not taking on any new debt. Payment history is a big factor in your credit score, and stopping payments for a period of time will negatively impact your credit. How long payments are missed and the amount of debt you have will all impact your score. But once you’re able to get back on track, you will begin to see improvements within the first year. It’s important to remember, though, that it may take a full seven years to get back to where you were before. Crystal Rau, CFP® Crystal Rau , CFP® Alternatives to debt relief Consider the following alternatives to determine which makes the most sense for you. Budgeting and expense management Review your income and expenses to identify areas where you can cut back and allocate more funds toward paying off debt. Debt consolidation loan Combine multiple debts into a single loan with a lower interest rate or more manageable monthly payments. Read More Best Debt Consolidation Loans Credit counseling Work with a nonprofit credit counseling agency to create a debt management plan (DMP) and negotiate lower interest rates with creditors. Bankruptcy (last resort) If your financial situation is dire, Chapter 7 or Chapter 13 bankruptcy might provide a fresh start. However, it comes with significant long-term consequences. FAQ Is debt relief legal? Debt relief refers to strategies designed to help individuals or businesses manage, reduce, or eliminate debt. It is legal, but it’s important to work with reputable companies to avoid scams. How long does debt relief take? The timeline depends on the method. Debt settlement typically takes 24 to 48 months, while debt consolidation loans may provide immediate relief. What types of debts qualify for relief? Debt relief can address unsecured debts, such as credit cards, medical bills, and personal loans. Secured debts (e.g., mortgages, car loans) and certain types of tax or student loan debt may not qualify. Can debt relief eliminate all my debt? While some programs, such as debt settlement, can reduce the total amount owed, you’ll still need to repay part of the debt. Complete elimination is rare and may only happen in bankruptcy.