Debt Settlement Programs: How They Work and Who Can Help

debt settlement programs
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If you have ever been in so much debt or have known someone who has been in debt, you may have heard about debt settlement programs or debt relief companies.

In 2020, millions of American consumers are currently experiencing the negative impact of the global pandemic. People everywhere are dealing with financial hardships like job loss, credit card debt. Some barely have the ability to make minimum monthly payments. 

A debt settlement program may be a good option for you to consider, depending on your financial situation, especially if debt has become overwhelming.

You can find these programs within debt settlement companies. Through debt negotiation, settlement companies with creditors on your behalf to resolve your debs for less than what you owe. If you can find a debt settlement program that offers low fees and minimum debt requirements, you will easily be able to sign up no matter your debt total.

What is a Debt Settlement Program?

Debt settlement services typically involve a debt settlement company negotiating with creditors to allow you to pay a settlement agreement. Working with a debt settlement company may allow you to save money and resolve or reduce your debt.  It allows you to pay your creditors in a lump sum payment without the need for consolidation loans.

Settlement: a lump sum that’s less than the full amount you owe.

To make the lump sum payment, the program may require you to set aside a specific amount of money every month in a savings account. The debt settlement company will then ask you to transfer the saved amount into an escrow account to accumulate enough savings to pay off a settlement amount that has been reached.

Note that these debt settlement programs will often encourage you to stop making any monthly payments to creditors in order to enroll in a debt relief program. This is a strategy to allow the debt settlement companies to negotiate a better amount for your settlement and create a payment plan. Still, you may continue to receive calls from debt collectors, your credit card issuer, or financial institution. Entering a debt management program may also damage your credit rating because of late fees and interest shown on your credit report. 

Debt relief company is usually only for unsecured debt such as credit cards. Debt such as federal student loans, private student loans,  personal loans, a house, or a car loan is usually not covered within debt settlement programs.

The Risks of Debt Settlement Programs

Keep in mind the risks associated with debt settlement programs. Some debt settlement service providers claim to offer low-cost financial services, reduce your outstanding debt by 40-50% less than the amount you owe, and get you debt-free in 2-3 years with a debt management plan. 

Though it sounds good, you should know the process that goes into settling unsecured debt for less than what you owe.

See the risks below:

Your Credit Report Will Suffer

Suppose you are already delinquent on your accounts and drowning in credit card debt. You will be more behind on payments due to the strategy the debt settlement company will use to create negotiation leverage and settlement offers. You will be skipping more payments, which will lead to more collection calls, letters from collection agencies, and the accumulation of late fees, interest, and other penalties.

With this in mind, when you stop making payments understand that your credit score can be severely damaged and take years to repair while removing the thought of any bank loans in the near future.

Debt Settlement Programs Are Not Guaranteed

As stated above, debt-settlement companies generally only work with unsecured debts: credit card bills, medical bills, and unsecured personal loans. Debt secured by collateral is usually not taken into consideration.

Be aware that there are no guarantees with debt settlement programs. Creditors are not under obligation to work with debt settlement firms and settle your debt.

Another reason all debts may not be settled is that many people drop out of the debt settlement agreement before completing it.

According to the Association of Settlement Companies, people who have dropped out of the debt settlement programs saved $58.1 million in aggregate but paid $55.6 million in fees, nearly canceling out their savings.

Expect Fees

According to the Federal Trade Commission, debt settlement companies cannot charge upfront or advance fees. But they may charge a percentage of each debt they settle based on the balance of that debt when you enrolled in the program.

For example, if you owe $20,000 and the company decides to negotiate $8,000, the company will charge 25%, a $5,000 fee.

You can also expect additional fees like a setup and monthly fee to maintain the dedicated saving account set up under the program.


The IRS considers forgiven debt as income. You may want to expect to pay some type of taxes on your savings. Credit card companies may report settled debt to the Internal Revenue Service, which the IRS will consider income unless you are “insolvent.” This means when your total debts are more than the fair market value of your total assets.

Depending on the type of debt you have, your creditor may send you a 1099-C cancellation of the debt tax notice. This information will then be reported to the IRS, and you will need to report it as “other income” on your federal income taxes.

This type of taxable income will be taxed at your standard rate, which will usually range from 10% to 39.6%, depending on the state you reside.

Note that if a 1099-C is issued to you, the IRS will also be receiving a notice of income, and you can be penalized for not reporting.

 Make sure to consult a tax professional about additional tax obligations you’ll be taking on if you settle your debt.

Best Debt Settlement Companies

Accredited Debt Relief

Accredited Debt Relief is recognized as being the best company that offers debt settlement programs in 2020. They specialize in offering programs that relieve debt with high-interest credit card debt over $10,000.

Since 2011, they have offered a free consultation for potential clients with a certified debt specialist who will talk over the client’s current situation and options.

If they agree that it is a good fit, they will start the process off by creating a separate account, saving money, and stopping the use of credit cards.

After that, the company will begin to negotiate with creditors on their client’s behalf. Accredited Debt Relief offers a money-back guarantee that lets you cancel your program at any time without a penalty.


  • Receive a free consultation describing the settlement program with a certified debt specialist.
  • You can settle your debts for a little as 30% of what you owe.


  • If you do not have at least $10,000 worth of debt, this program will not work for you.
  • There is a bit of a lack of transparency in terms of pricing.

If you’re interested in learning more or speaking to an agent, you can receive a free quote here.


This provider is known to be one of the best debt settlement programs for tax debt. CuraDebt offers special assistance for consumers who owe taxes. They also provide traditional debt settlement programs to help consumers become debt-free while paying less than what they owe.  

Like Accredited Debt Relief, CuraDebt also offers a free consultation for consumers. On their website, you will find letters of consumers who have settled debts for as little as 20% of what they owed. 

CuraDebt does an excellent job of being transparent with its pricing. They report that their customers typically pay approximately 20% of their enrolled debt amount in fees over time, also staying away from monthly administration fees. They offer flat-fee pricing and help settle and negotiate on IRS and state tax debt.

CuraDebt stands out amongst the competition by having federal and state tax experts on staff and provides this assistance in all 50 states.

CuraDebt is an excellent option if you owe back taxes because of their specialized program, but they are not limited to only tax relief.


  • Free consultation
  • Specialized debt settlement programs for tax relief


An in-person consultation is only available in Hollywood, Florida.

New Era Debt Solutions

NewEra Debt Solution offers professional and excellent customer satisfaction by keeping an attorney on staff, ensuring everything is done according to state and federal law. This should give consumers and potential clients confidence the job is being done right.

This provider has helped clients settle over $250 million in debt. They offer clear plans without any monthly administration fees. No upfront charges or advanced fees are needed for their services. Performance-based fees are only charged when results have been seen.

According to New Era Debt Solutions, their clients settle their debts and become debt-free after an average of fewer than twenty-eight months. The average client has settled their debts for 42.87% of what they owed.

You can rest assured this provider will provide excellent customer service. They handle all of their work in-house and do not outsource tasks to other third-party companies or firms.


  • Professional attorneys on staff
  • Free consultation with a counselor
  • No upfront fees or monthly administration charges


  • New Era Debt Solutions are not available in all U.S. cities. There are no locations in Maine, Iowa, or South Dakota.

DMB Financial

DMB Financial is best for dealing with high-interest credit card debt. They focus on helping consumers consolidate their debts into a new lower payment, which is very helpful when it comes to growing debts with high-interest rates.

DMB Financial remains transparent by reporting real-time results for its clients on its website. They also show that the clients have settled debts for as little as 30% of what they owed. A reassuring fact about DMB Financial is that they are a member of the American Fair Credit Council, which includes a select number of debt settlement companies committed to offering the highest standards of service to their clients.

DMB Financial believes that their potential clients may be able to become debt-free in 36 to 48 months. They offer a free consultation, in which they will go over your current situation, the amount of debt you owe, and goals. Afterward, they create a customized repayment plan program that best fits your situation. They will then go through the same process as the other providers. You will set money aside in another account to pay creditors. 

DMB Financial offers a program to consolidate all your bills into a single monthly payment you make into a savings account each month. This is very helpful to those who have high-interest rates and bills that are too high and continue to grow.


  • Free consultation
  • Consolidate high-interest debts into a single lower program payment


  • Lack of transparent pricing on their website
  • No specific information and qualifications for their programs

National Debt Relief

National Debt Relief is one of the best overall debt settlement programs that are offered in the market. They have an excellent history of providing results and settling debts for one-third the amount with transparent pricing. They provide debt relief services that eliminate the need to take out a debt consolidation loan. 

You can find credible information on their website documenting their processes and results. They have a page dedicated specifically to debt relief letters from their consumers. They settle debts for as little as 36% of the amount originally owed.

You will not have to pay upfront fees to use their service. Consumers usually pay between 15% to 25% of the total debt by the time they settle debts.

National Debt Relief’s programs usually last anywhere from 24 to 45 months. They offer a money-back guarantee for their clients who are not satisfied.

You can receive a free quote by applying here.


  •     No upfront fees
  •     Maintains an A+ rating with the Better Business Bureau (BBB)
  •     Money-back guarantee


  •     They do not work with mortgage loans and back taxes
  •     To qualify for the program, you have to have at least $7,500 in debt and be several months behind on payments.

Alternatives to Debt Settlement

Besides debt settlement programs, other options available. Even if you have bad credit or less than perfect credit score, you still could qualify for a debt consolidation loan or home equity loan. Other alternatives to working with a debt settlement firm include working with nonprofit credit counseling agencies and professional credit counselors.


When searching for a good settlement company, you should search for reputable organizations that have been in business for more than five years. They should have a track record of successfully helping their consumers with their debt.

If companies show transparency in their pricing and freely show them on their website, you should look into them. Some debt relief companies will offer free quotes,  You should take advantage of that before committing long term. Lastly, if they are proven and recognized by the debt settlement industry or consumer credit advocates, they are trustworthy and worth looking into.

With the proper research and investment of your time, you can find the right program for your current situation and hopefully be relieved from your debt at the appropriate time.

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