Resources: the official sources and the terms worth knowing
Real .gov and nonprofit links first, then the mistakes and terms that come up most.
- Consumer Financial Protection Bureau — Debt Settlement — Federal guidance on debt collection, debt relief options, and how to file a complaint against a company.
- Federal Trade Commission — Coping With Debt — The FTC's own plain-English guide to debt settlement, the Telemarketing Sales Rule, and warning signs of a bad offer.
- National Foundation for Credit Counseling (NFCC) — Directory of accredited nonprofit credit counseling agencies offering free consultations.
- IRS Tax Topic 431 — Cancellation of Debt — Official rules on when forgiven or settled debt counts as taxable income, and the exclusions that may apply.
Rules, thresholds and providers described here are those of the United States.
Checklists you can work through
Before you talk to a settlement company
- Write down every balance, rate and how far behind each account is.
- Calculate your rough debt-to-income ratio using the calculator on this site.
- Call an NFCC-affiliated nonprofit counselor first for a free comparison.
- Decide the maximum fee percentage you'd consider reasonable.
- List the specific questions you want answered about fees and timing.
- Know that you're not obligated to enroll on the first call.
Before you sign anything with a debt settlement company
- Get the total fee, in dollars or a clear percentage, in writing.
- Confirm no fee is charged until a debt is actually settled.
- Ask exactly where your money sits while you're saving toward a settlement.
- Ask about the credit and tax consequences directly, and expect a straight answer.
- Check the company's complaint history with the Consumer Financial Protection Bureau.
- Compare the offer against a free session with an NFCC-affiliated counselor first.
Common mistakes people make with debt settlement
Paying a settlement company large upfront fees before any debt is settled
This is against federal rules for phone-solicited debt relief under the Telemarketing Sales Rule. Legitimate fees are only charged after a debt is actually settled and you've made a payment on the new terms.
Assuming a settled debt is tax-free
Forgiven amounts of $600 or more are usually reported on a 1099-C and taxed as income unless an exclusion like insolvency applies. Check IRS Tax Topic 431 before agreeing to a settlement.
Not budgeting for the possibility a creditor won't settle
Some creditors decline to settle, especially on smaller balances or accounts already sold to a collector. Ask any company what happens to fees on accounts that never settle before you enroll.
Assuming settlement stops lawsuits
Enrolling in a program doesn't remove a creditor's right to sue you over an unpaid debt, and the risk can increase while accounts go delinquent. Respond to any lawsuit by its deadline regardless of your enrollment status.
Only comparing the advertised savings percentage
Add company fees and likely tax on the forgiven amount to get the real, all-in cost. The true savings are often smaller than the headline number, though still sometimes worthwhile.
Never getting a free second opinion first
A free NFCC-affiliated counseling session costs nothing and is worth trying before enrolling in any paid program, since it can clarify whether settlement is actually the best fit for your situation.
Glossary
The words that get used as if everyone already knows them.
Debt settlement
Negotiating with a creditor to pay less than the full balance owed, usually as a lump sum, in exchange for the account being marked settled.
Debt consolidation
Combining several debts into one new loan or payment, usually at a lower interest rate, while still repaying the full amount owed.
Debt management plan (DMP)
A structured repayment plan, usually set up through a nonprofit credit counselor, that consolidates payments and often reduces interest rates without reducing the amount owed.
Telemarketing Sales Rule
The federal rule that generally bars phone-solicited debt relief companies from charging a fee until a debt has actually been settled.
Charge-off
When a creditor writes off a debt as unlikely to be collected, usually after around six months of non-payment. The debt still legally exists and can be sold to a collector.
Cancellation of debt income (1099-C)
The IRS treats forgiven debt of $600 or more as taxable income in most cases, reported on Form 1099-C, unless an exclusion like insolvency applies.
Insolvency exclusion
An IRS exclusion that may let you avoid tax on forgiven debt if your total debts exceeded your total assets immediately before the cancellation.
Debt-to-income ratio
Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders and counselors use it to gauge how manageable your debt load is.
Secured vs unsecured debt
Secured debt (like a mortgage or car loan) is backed by an asset the lender can repossess. Unsecured debt (like most credit cards) isn't backed by a specific asset, which is what settlement generally applies to.
Credit counseling
A free consultation, typically through an NFCC-affiliated nonprofit agency, reviewing your finances and explaining your realistic options, including a debt management plan.
Statute of limitations on debt
The time limit, set by each state, within which a creditor or collector can sue you over unpaid debt. It varies by state and debt type, typically three to six years.
Default judgment
A court ruling against you that occurs automatically if you don't respond to a lawsuit by its deadline, which can lead to wage garnishment in many states.