Resources: the official sources and the terms worth knowing
Real .gov and nonprofit links first, then the mistakes and terms that come up most.
- Consumer Financial Protection Bureau — Debt Collection — Federal guidance on your rights with debt collectors, how to file a complaint, and how to dispute a debt.
- National Foundation for Credit Counseling (NFCC) — Directory of accredited nonprofit credit counseling agencies offering free consultations.
- IRS Tax Topic 431 — Cancellation of Debt — Official rules on when forgiven or settled debt counts as taxable income, and the exclusions that may apply.
- Federal Student Aid — studentaid.gov — Official source for federal student loan repayment plans, deferment, forbearance and forgiveness programs.
- United States Courts — Bankruptcy Basics — The federal courts' own plain-English explanation of Chapter 7 and Chapter 13 bankruptcy.
Rules, thresholds and providers described here are those of the United States.
Checklists you can work through
Before you talk to a collector
- Write down the account number and the balance they say you owe.
- Ask for, or check that you've received, the written validation notice.
- Check the date of your last payment against your state's statute of limitations.
- Decide in advance what you can realistically offer, if anything.
- Keep a log of the date, time and what was said on the call.
- Know that you can ask them to stop contacting you in writing at any point.
Before you sign anything with a debt relief company
- Get the total fee, in dollars or a clear percentage, in writing.
- Confirm no fee is charged until a debt is actually settled.
- Ask exactly where your money sits while you're saving toward a settlement.
- Ask about the credit and tax consequences directly, and expect a straight answer.
- Check the company's complaint history with the Consumer Financial Protection Bureau.
- Compare the offer against a free session with an NFCC-affiliated counselor first.
Common mistakes people make with debt relief
Paying a settlement company large upfront fees before any debt is settled
This is against federal rules for phone-solicited debt relief under the Telemarketing Sales Rule. Legitimate fees are only charged after a debt is actually settled and you've made a payment on the new terms.
Assuming a settled debt is tax-free
Forgiven amounts of $600 or more are usually reported on a 1099-C and taxed as income unless an exclusion like insolvency applies. Check IRS Topic 431 before agreeing to a settlement.
Treating medical debt like a credit card balance
Medical bills are often negotiable directly with the provider's billing office, and hospitals are generally required to offer financial assistance policies. Ask before assuming you need a settlement company.
Letting a settlement company negotiate federal student loans
Federal student loans have their own free relief programs handled through your loan servicer. Be skeptical of any paid company offering to "settle" federal student debt for an upfront fee.
Only comparing monthly payments, not total cost
A lower monthly payment can still cost more overall if the term is longer. Compare total cost and time to payoff, not just the monthly figure — the calculators on this site do this automatically.
Never verifying a debt before paying it
You have 30 days from the collector's validation notice to dispute a debt in writing. Some debts turn out to be errors, duplicates, or past the statute of limitations.
Closing every credit card the moment a balance is paid off
Closing accounts can shorten your average account age and reduce available credit, both of which can lower your score. It's often better to keep older, no-fee accounts open and unused.
Treating debt relief companies and free nonprofit counseling as the same thing
A free NFCC-affiliated counseling session costs nothing and is worth trying before enrolling in any paid program, since it can clarify whether a paid option is actually needed.
Glossary
The words that get used as if everyone already knows them.
Debt consolidation
Combining several debts into one new loan or payment, usually at a lower interest rate, while still repaying the full amount owed.
Debt settlement
Negotiating with a creditor to pay less than the full balance owed, usually as a lump sum, in exchange for the account being marked settled.
Debt management plan (DMP)
A structured repayment plan, usually set up through a nonprofit credit counselor, that consolidates payments and often reduces interest rates without reducing the amount owed.
FDCPA
The Fair Debt Collection Practices Act, the federal law that limits what third-party debt collectors can and can't do when contacting you.
Statute of limitations on debt
The time limit, set by each state, within which a creditor or collector can sue you over unpaid debt. It varies by state and debt type, typically three to six years.
Charge-off
When a creditor writes off a debt as unlikely to be collected, usually after around six months of non-payment. The debt still legally exists and can be sold to a collector.
Debt-to-income ratio
Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders and counselors use it to gauge how manageable your debt load is.
Secured vs unsecured debt
Secured debt, like a mortgage or car loan, is backed by an asset the lender can repossess. Unsecured debt, like most credit cards, isn't backed by a specific asset.
Cancellation of debt income (1099-C)
The IRS treats forgiven debt of $600 or more as taxable income in most cases, reported on Form 1099-C, unless an exclusion like insolvency applies.
Snowball method
A payoff strategy that targets the smallest balance first, then rolls that payment into the next-smallest balance, to build early momentum.
Avalanche method
A payoff strategy that targets the highest interest rate first, which generally minimizes total interest paid over time.
Income-driven repayment (IDR)
A federal student loan repayment plan that caps your monthly payment as a percentage of your discretionary income, with potential forgiveness after a set number of years.