How do debt relief companies work?

Total U.S. credit card debt reached $1.26 trillion in the second quarter of 2026, according to data from the New York Fed, marking a $21 billion increase from the previous quarter. If you're struggling with credit cards, personal loans or other bills, a debt relief company may be able to negotiate with your creditors to get your balances lowered.

These firms, also known as debt settlement companies, report being able to reduce unsecured debt balances by as much as 50%. The cost for their service isn't negligible, however: Most charge between 15% and 25% of the enrolled debt. And your credit score will also take a hit.

If you're seriously in the red, the payoff may be worth it. Here's what to know about debt relief companies, how they operate, and how to find a reputable one.

Debt relief companies negotiate with your creditors to reduce the amount of debt you owe. They only work on unsecured debt, like credit cards, medical bills and some personal loans. (Loans that are secured by collateral, like mortgages and auto loans, aren't eligible.)

There's also a minimum balance requirement for enrollment, typically either $7,500 or $10,000.

During the process, the debt relief company will typically advise you to stop making payments to your creditors and instead put that money in a special savings account.

If your creditors accept the proposal, the funds in the account will be used to pay the negotiated amount.

Debt relief companies typically charge clients between 15% and 25% of their total enrolled debt. The exact percentage is largely determined by state regulations, although your balance size and other factors may also come into play.

Federal Trade Commission regulations prevent debt relief companies from requiring you to pay a settlement fee until an agreement is reached with the creditor and you've made at least one payment.

You may also be charged fees to open and maintain the savings account used to pay your creditors. One-time setup fees can be anywhere from $10 to $50, while account maintenance fees are typically $5 to $10 per month.

The best debt relief companies are transparent about their fee structure, have widespread availability and have been in business long enough to establish a good reputation.

Freedom Debt Relief and New Era Debt Solutions both have strong track records for customer satisfaction, including A+ ratings from the Better Business Bureau.

Accredited Debt Relief is a good option if you have a smaller balance to tackle. While most debt relief companies require clients to have at least $7,500 or even $10,000 in unsecured debt, its minimum is only $5,000.

ADF reports that clients who complete its payment program can be debt-free in as little as 24 months.

Regulations regarding debt relief are determined by state law. As a result, some companies choose not to offer their services in certain states where they determine that the regulatory requirements or compliance environment is not commercially viable for their business. National Debt Relief operates in 45 states and Washington, D.C., giving it a much wider footprint than many competitors. (It does not operate in Connecticut, Oregon, Vermont, West Virginia and Wisconsin.)

NDR's debt minimum is only $7,500, lower than many competitors.

Even when you use a legitimate debt relief company, there are some risks and trade-offs.

1. Not all debts qualify for debt relief

Debt relief companies work with unsecured debt like credit card bills, personal loans and private student loans. Mortgages and auto loans are secured debts that use your house or your car as collateral, so they don't qualify for a debt settlement program.

Most companies also won't work with tax debt, although CuraDebt handles both. You can also look into firms that specialize in tax debt.

2. Your credit score will take a hit

Since debt settlement companies encourage clients to stop making payments to creditors, your credit score will drop. Payment history makes up 35% of your score and a negative mark can remain on your report for up to seven years. 

While settling debt is better than not paying or filing for bankruptcy, you could see a decline of more than 100 points, according to Debt.org.

3. Creditors may keep charging you

While the debt relief company is negotiating, your creditors may continue to charge late fees and interest. If you've stopped payments completely, you could face more calls from collections departments and even legal action. According to the CFPB, debt relief companies are often unable to settle all debts.

4. You may have to pay taxes on forgiven debt

Under U.S. tax law, almost any debt over $600 that is forgiven is considered taxable income. You'll probably receive a Form 1099-C, Cancellation of Debt, from your creditor to file with your tax return. 

If you have $20,000 in credit card bills and pay $10,000 to settle that debt, for example, the remaining $10,000 your card company is forgiving will be added to your income for the year. That could raise your income bracket and increase your tax obligation, so consult a tax professional before moving ahead.

5. You could owe more than you started out with

Debt relief companies can charge as much as 25% of your enrolled debt. You may also be charged a fee for managing the savings account.

With those fees and the increased tax liability, a debt relief company will need to get your creditor to lower your balance significantly or you could wind up paying more than if you had never signed up.

6. Scams are a real issue

While many debt settlement companies are legitimate, debt relief scams are commonplace. Common red flags include: 

• Unsolicited contact: Reputable debt settlement companies don't cold-call potential clients. 
• Upfront fees: A debt relief company should never ask for payment upfront. 
• Unrealistic promises: Avoid companies promising your debts will vanish or be settled for very little. 
• Telling you to stop talking to your creditors: If a debt relief company tells you to cut all ties with your creditors, the CFPB recommends against doing business with them.

Evaluate any debt relief company carefully. You can contact your state’s banking regulator to find out if a particular company is licensed. 

If you’re concerned about using a debt relief or settlement company, there are several ways to avoid it altogether. Here's how to navigate the process.

Tackle debt settlement yourself

It won't be easy to negotiate with creditors and follow your own savings plan, but it’s far from impossible. 

You may be able to lower your interest rate or minimum monthly payment.

The CFPB has sample letters you can use to begin the process. It also suggests creating a budget to see what you can reasonably put towards your debts each month. 

If your account is in collections, contact the debt collection company (which is not necessarily the original creditor). Be sure to create records of your conversations and get an agreement in writing before making a payment.

Take out a debt consolidation loan

If you’re overwhelmed by the number of outstanding accounts you have, a debt consolidation loan can organize your debt into one monthly payment with a single fixed interest rate.

One of our top picks for debt consolidation loans is Upstart, known for working with borrowers with bad credit or even no credit. Another great option, Avant has low origination and upfront fees, as well as a quick turnaround for approval and funding.

Work with a credit counseling service

If you need help with tackling your debt, non-profit credit counselors are available in most of the country. While they don't negotiate lower balances, they can work with your creditors to reduce interest rates or fees or to extend tyour repayment period. 

Instead of stopping payments, you'll typically make one monthly payment to the counselor, who then splits it among your creditors.

Most credit counseling services charge a fee, but they're typically cheaper than debt relief. You can find one by checking with the Financial Counseling Association of America or the National Foundation for Credit Counseling. 

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt relief story is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt relief products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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