5 Must-Ask Questions Before You Sign Up for a Debt Relief Program

If you’re struggling with crushing credit card debt and mounting overdue bills, debt settlement could be a lifeline, helping you clear your balances for less than you owe.

When you successfully settle a debt, you could reduce the amount you owe by around 50%, on average, in exchange for a lump sum cash payment equal to the remaining balance. But negotiating down your debt can be tricky, which is why a whole industry of for-profit debt relief and debt settlement companies exist.

These companies work on your behalf to settle each of your overdue debts and tend to be more successful at achieving results than the average borrower, says credit expert Beverly Harzog, author of The Debt Escape Plan: How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt-Free. But that doesn’t mean results are guaranteed. Creditors and debt collectors do not have to agree to a settlement or work with debt settlement companies.

To increase the odds a creditor will settle, debt relief companies typically suggest you stop making monthly payments on your accounts to give them leverage to negotiate. This could hurt your credit score and lead to lenders or debt collectors suing you, even in the midst of negotiations. You’ll also need to make deposits every month into a savings account designated by the debt settlement company to build up funds to pay any settlement they secure.

Unfortunately, not all debt settlement companies are transparent about the risks involved or the process. Shady and scam debt companies exist, and these bad actors charge costly upfront fees, make big promises, and, then, do nothing to help you.

To avoid ending up in a worse financial position, you should ask any debt settlement company you’re considering working with the following questions before signing up:

1. Are you a member of the American Association for Debt Resolution?

Checking that the debt relief company you’re considering belongs to this industry group can help you avoid scams or bad operators. To become an accredited member of the AADR, a company must undergo bi-annual audits by an independent auditor to check that its practices comply withfederal and state regulations. You can search the AADR’s database to see which companies are current members.

To get a sense of how the company treats its clients, search for the organization on the Better Business Bureau’s website, Harzog advises. Those with a BBB-accredited business sticker have been screened by the nonprofit and have historically met its standards for customer service, transparency and ethical business practices. You can also see its BBB grade and read reviews left by other customers.

Finally, the Federal Trade Commission recommends you “search online for the company’s name, plus complaint or review.”

2. Is debt settlement the best option for my financial situation?

A legitimate debt relief company will take the time to learn about your debts and how they fit into your overall financial picture before enrolling you in its program, according to the FTC. Shadier organizations will not do such a review and immediately try to steer you into debt settlement or lock you into a contract. Reputable companies will explain the various options you have for repaying your debt and may even suggest alternative paths, like debt consolidation, bankruptcy or credit counseling, that could be more appropriate for your situation.

“Our member companies are committed to recommending the best option for the consumer based on that unique financial position whether it is debt resolution, bankruptcy, or credit counseling,”AADR CEO Denise Dunckel Morse said in an email. “In addition, all AADR members must notify clients of their rights, options, fees, and potential impacts of debt resolution before enrollment, as well as ensure a client’s financial wellbeing is represented.”

3. How much of my debt can you get forgiven?

Beware any debt settlement company that promises to erase all your debt or reduce your debt by a certain amount or percentage, Harzog says. Lenders do not have to accept settlement agreements and some financial institutions refuse to work with debt settlement firms at all. While debt relief companies will try to reduce your debt as much as possible, they cannot promise a specific or even successful outcome.

That said, debt relief companies should be able to provide you with a realistic savings estimate, or an idea of how much they believe they can reduce your debt. Drawing upon their trove of past negotiations and settlement rates, this estimate should be specific to your situation and creditors, rather than just overall averages. If you’re unclear how they arrived at this estimate, ask them to explain so you know you’re not just being quoted a generic number.

To put any estimates you receive in context, the AADR says the average settlement amount is 50.7% of the balance owed. While companies can’t promise they’ll successfully settle your debt, it is worth asking whether they offer any other program guarantees; if so, be sure they clearly outline how the guarantee works.

4. How soon will I get my first settlement?

Debt relief companies should be upfront about how much you must save in your account before the company will make an offer to a creditor and how long it may take before you see your first settlement agreement. “Consumersgenerally see initial account settlements within four to six months of starting a debt resolution program,” says Dunckel Morse, citing research released by AADR in 2023.

But the process could take much longer, especially if you’re looking to pay less than you owe on multiple accounts. A 2021 report out of the Harvard Kennedy School found that among accounts successfully settled within three years, the average time to settle more than one balance was around 14 months. Less than a quarter of those who’d worked with a debt relief company had successfully settled all their accounts after three years.

Each debt settlement firm monitors this information and you should ask them what share of their customers get a debt resolved within three months, six months, a year, or whatever your ideal done date may be. Also, enquire about how many people do not finish the program.

Part of the reason some customers don’t see all their accounts settled when working with these organizations stems from the fact that many struggle to make the required monthly deposits long enough to save the money needed for settlements and drop out.

The longer negotiations drag on, the more interest and fees your debt will accrue and the more likely it is you may be sued by a creditor or debt collector. (It’s also a good idea to ask what help a company can offer if you are sued, and if they do offer legal advice, whether there are additional fees for using the service.)

5. What fees do you charge?

It is illegal for debt settlement companies to charge an upfront fee or try to collect any money from you before they’ve successfully settled your debt, says Rod Griffin, senior director of public education and advocacy for credit bureau Experian. Instead, reputable debt settlement companies charge either a percentage of the account balance enrolled in the program or a portion of the amount saved through settlement each time their negotiations are successful. Company fees range from 15% to 25%, with an average fee of 16.8%, according to the AADR.

In addition, you may owe account setup and monthly fees to the institution that manages the special bank account where you make deposits to save up for negotiations, adds Harzog, who advises getting all fee details in writing before working with the debt relief company.

If you do not like the settlement offer a company negotiates, you do not have to accept it. “Under FTC rules, consumers can reject it without being charged anything,” says Dunckel Morse. “Clients are always in control of any funds contributed to their dedicated account, and maintain the ability to leave their program at any time, for any reason.”

It’s important to factor in how much fees are when forecasting any settlement savings you could potentially see. For instance, AADR’s research shows that while the average debt was settled for about half the amount owed by a client when they enrolled in the program, a client’s actual savings were closer to 32% after accounting for fees.

As well as fees, you could also owe tax on any settled accounts, as forgiven debt can be viewed by the IRS as taxable income in certain situations.

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