What is a debt settlement company?

Total U.S. credit card debt reached a record $1.28 trillion in 2026. 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 balance lowered.

Depending on the case, these companies report being able to settle unsecured debt for up to 50% less than the original balance.

Success isn't guaranteed, though, and fees can be as much as 25% of your enrolled debt. (Your credit score will also take a hit.)

If you're deeply in the red, however, the payoff can be worth the drawbacks. Here's what you need to know about debt relief companies, how they operate and how to know which are reputable.

Debt relief companies can reduce the amount of debt you owe by negotiating with creditors on your behalf. They only work on unsecured debt, and there's a minimum balance requirement for enrollment, typically either $7,500 or $10,000.

During the process, the 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.

For-profit debt relief companies charge clients between 14% and 25% of their total enrolled debt, with the exact percentage determined by state regulations. Reputable debt relief companies will assess these fees after your debt is settled.

You may also be charged fees for opening and maintaining the savings account the company uses to pay your creditors. Our analysis found that opening charges averaged between $8 and $10, with another $9 to $10 each month for account maintenance.

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.

New Era Debt Solutions has a strong track record with customer satisfaction, including an A+ rating from the Better Business Bureau.

Accredited Debt Relief is a good option if you need to clear your debt quickly: It claims clients who complete their payment program can be debt-free in as little as 24 months.

While most debt relief companies require clients to have $10,000 in unsecured debt, National Debt Relief's minimum is only $7,500. It operates in 47 states and the District of Columbia, making it a good choice for availability, as well.

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

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’ll 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. There are many scams

While there are many legitimate debt settlement companies, debt relief scams do exist. 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.

Make sure to 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, you'll want to 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. They work to lower your balances by extending the period you can repay and lowering the interest rates and fees. 

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 it's typically a cheaper alternative to a debt relief company. You can find a service 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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