Are all debt relief companies a scam? Is bankruptcy really better? Get answers before you sign up.

Done right, hiring a company to negotiate with credit card companies and lenders can be the key to getting out of debt. But there are a few misconceptions about when and how to use debt settlement.

Understanding how it works is key to making debt relief work for you.

Myth #1: My debt will eventually drop off my credit report, so why should I pay it off?

FALSE

It’s true when you default on a credit card or loan; it only stays on your credit report for seven years. But that doesn’t mean the debt is forgiven after it disappears. Your credit score may recover, but creditors — or more likely, collections agencies — will still demand you pay off your account.

The longer you ignore debt, the more of a headache it can be. Creditors can and do sue delinquent borrowers — and often add attorney’s fees and court expenses to your bill. If the judge finds you at fault or ignores the lawsuit, they could file a default judgment against you. This allows them to garnish your wages or even freeze money in your bank accounts.

Myth #2: Filing for bankruptcy is better than debt relief.

IT DEPENDS

Debt relief and bankruptcy are different solutions for different circumstances. Chapter 7 bankruptcy discharges almost all debts, but you have to pass a means test to prove that there’s no way you can pay it off. If you can qualify for Chapter 7, that means you likely can’t afford debt relief.

Chapter 13 bankruptcy doesn’t come with a means test — or discharge your debt. Instead, it puts you on a payment plan with your creditors at rates and terms that better fit your budget. It can take longer than debt relief, and there are limits to how much you can discharge through Chapter 13. If you owe more than bankruptcy can cover, debt relief might be the better option.

But filing for bankruptcy seriously hurts your credit. The red mark will stay on your credit report for 7 to 10 years — making it difficult to qualify for financing in the future. With debt relief, you have a better chance of keeping your credit score above water — more on that below.

Myth #3: All debt relief companies are scams.

FALSE

Debt relief has received a bad rap after some companies collected fees for debt settlements and dropped off the face of the Earth. But the US government started a major crackdown in 2010 to root out the bad apples.

Legitimate companies like National Debt Relief can actually help you get out of debt — if it’s the right option for you. You can make sure you aren’t signing up for a scam by checking the Federal Trade Commission’s list of companies and people banned from debt relief. Also, look for American Fair Credit Council (AFCC) or International Association of Professional Debt Arbitrators (IAPDA) accreditation.

Myth #4: I can’t settle debts on my own.

FALSE

Anyone can pick up the phone and negotiate down the debt on their own. If you think you can successfully settle your accounts on your own, you could save yourself on the fee it costs to hire a debt settlement company — usually about 15% to 25% of your enrolled debt.

But there are benefits to handing it over to the experts. Debt settlement companies are seasoned negotiators and already have established relationships with creditors.

Myth #5: Debt relief programs will take forever.

FALSE

Debt relief programs usually take between two and four years to complete. If you think it will take you less time to pay off your debts on your own, you might benefit from other options.

How long it takes depends on how quickly you can save up the funds to pay off your account — and how willing your creditors are to settle. If your creditors agree to a settlement right away and you have the money ready, you’ll finish your debt settlement program more quickly.

Myth #6: Few people actually have their debts settled.

FALSE

On average, 74% of people successfully settle at least one account through a debt settlement program.

This is according to a January 2021 report by the Harvard Kennedy School on financial outcomes for debt settlement programs between 2011 and 2020.

Here are a few other key findings from this report on the success rate of debt settlement after 36 months:

  • The average amount of unsecured debt owed: $28,000 across 6.93 accounts
  • Average debt settled: 55% of debt across 3.8 accounts.
  • Average savings after fees: $5,400

Myth #7: I can’t get out of debt if it was already sold to a debt collector.

FALSE

Debt collectors might be more willing to work with you than you think. Ignoring a collections agency might land you in a lawsuit. But if you reach out and propose a payment plan or a settlement, they might accept. It’s their job to collect on your debt, after all.

It’s only after you receive a default judgment that negotiating gets tricky. At that point, the collections agency can garnish your wages and has no reason to budge.

Myth #8: Debt relief companies can’t charge fees upfront.

TRUE

Before 2010 it was common practice for debt relief companies to collect fees when you enrolled. In fact, the GOA believes it to be one of the major reasons debt relief success rates were so low at the time.

But now it’s illegal for any debt settlement company to charge fees upfront, thanks to a 2010 amendment to the Telemarketing Sales Rule. Companies can now only collect fees on accounts they’ve already negotiated down. They can also require you to start putting funds into an escrow account to cover the settlement and fees right away.

Myth #9: Debt settlement companies can guarantee they’ll settle all of my debts.

FALSE

According to the Telemarketing Sales Rule, it’s illegal for debt settlement companies to guarantee that they’ll settle all or any percentage of your debts. In fact, it’s illegal for any debt relief company to misrepresent its services.

Legitimate debt relief companies won’t make any guarantees and will be upfront about your program's costs and timeframe. They should also disclose any negative consequences of using the service — like a potential drop in your credit score.

Myth #10: Debt relief will help my credit score.

IT DEPENDS

Debt settlement can improve your credit score — if you’re able to complete the program without defaulting on any of your accounts.

But if you’ve already defaulted, debt relief can speed up the process it takes to get your finances back on track. This can improve your credit in the long run, but it won’t erase those defaults from your credit report. In that case, you’ll have to wait seven years for the defaults to fall off your credit report.

Myth #11: I can’t enjoy my life until I’m debt-free.

FALSE

Having debt can increase your monthly bills and make it harder to qualify for credit. But that doesn’t mean you need to put everything on hold until you pay it off.

It can be difficult to stick to a strict debt repayment plan if you don’t let yourself live a little. If you’re feeling down, find ways to bring joy to your life that aren’t overly pricey — like taking a luxurious bath at the end of a long week or an online movie night with friends.

National Debt Relief — by the numbers

National Debt Relief is a legitimate debt settlement company. It can negotiate down credit cards, unsecured loans, and private student loans on a case-by-case basis. Here’s a breakdown of how it works.

  • Average debt it settles: $28,000 to $30,000
  • Average savings: 50% before fees, or around 30% including fees
  • Average program length: 24 to 48 months

Bottom line

When you’re struggling with debt, acting as soon as possible can make it easier to recover. In some cases, debt settlement could be the way to go. Learn more about your options by reading our guide to debt relief.

Frequently asked questions

Answers to common questions about debt relief.

Does a debt relief program ruin my credit?

Just like a debt relief program won’t necessarily help your credit score, it also won’t ruin it on its own. It can generally have less of an impact on your credit than alternatives like bankruptcy, which appears on your credit report.

If you’re able to continue making minimum monthly payments, your credit score shouldn’t be affected while you’re enrolled. But if you choose to make payments toward your settlement account and not your creditors, it will have a negative impact on your credit score.

Is debt relief a good idea?

Debt relief isn’t the best solution for everyone. In fact, not all debt relief companies accept everyone who applies to use their services.

If you can negotiate down the debt on your own or pay it off over a couple of months, you might want to think twice about signing up. But if you have over $7,500 in unsecured debt and think you can still pay your creditors, enlisting professional help could be a good idea.

Which is better: Debt relief or debt consolidation?

That depends on your financial situation. If you have good or excellent credit, owe less than half of what you make in a year, and are currently employed, debt consolidation might be a better choice. Otherwise, another option — including debt relief — might be the way to go.