What actually happens when you enroll in a debt resolution program

Debt resolution, which you will also see called debt settlement, means negotiating with the companies you owe so that they accept less than the full balance. It only works on unsecured debt, so that covers credit cards, unsecured personal loans, store cards, credit union accounts and debts that have already gone to collections. Anything with property behind it is out, which means a mortgage or a car loan cannot go into a program, and neither can federal student loans.

What follows is roughly how a program tends to go. Every case is different and none of this is a prediction about yours.

Whether it makes sense at all

The first conversation should really be about whether you should do this. A program is worth thinking about when your current path has stopped working, which usually shows up as a minimum payment that is mostly interest and a balance that barely moves from one month to the next. You can check that for yourself with the payment calculator on our homepage. Put in what you owe and what you are paying, then look at the interest figure rather than the monthly one.

If you can clear the balance on your own within a few years, you should do that instead. If the debt is secured, a program cannot help you. If your income will not support the monthly deposit, enrolling mostly sets you up to fail. A consultant who does not raise any of that with you is not doing the job properly.

The account and the first deposit

Instead of paying your creditors, you start putting money into a dedicated account that you own and control. That account is what gives the negotiation any weight, because you cannot settle anything without funds to settle it with. The deposit gets set against what you can genuinely afford rather than what would look fastest on paper.

The part that surprises people is that payments to the enrolled creditors stop. That is how the leverage works, since a creditor who is being paid on schedule has no particular reason to accept less than they are owed. It is also where most of the difficulty in the following months comes from, so it is worth being clear about before you start rather than after.

What creditors do

Expect to hear from them more rather than less. Calls and letters pick up. Accounts get reported late, then later than that, and the credit bureaus pick all of it up. Some accounts move to an internal collections department and others get sold or handed to an outside agency. That sequence is worth understanding on its own, and we have set it out in what creditors do when you stop paying.

Your credit score is going to fall. Anyone selling you a version of this where your credit comes through intact is describing a different product. What that looks like in practice, and when it starts to recover, is in what debt resolution does to your credit.

You can tell collectors to contact your representative instead of you, which usually brings the volume down, though it does not always stop it completely. There are federal rules about how and when collectors are allowed to contact you. We are not a law firm and cannot advise you on any of that, so if you think a collector is breaking the law, talk to an attorney or file a complaint with the Consumer Financial Protection Bureau.

The first settlements

Some accounts become negotiable fairly early, usually because the balance is small enough that there is already enough in your account to make a credible offer. Larger balances take longer for the same reason, since a serious offer on a big account needs more money behind it.

Accounts also do not get settled in the order you would expect. Which one comes first depends on the size of the balance, how that particular company tends to negotiate, how far the account has progressed and how much you have accumulated. A small balance with a creditor known for settling quickly can be resolved long before a larger one, even when the larger one is the account keeping you up at night.

You approve every settlement before any money moves, and the agreement should be in writing before it does.

The part people underestimate

The hardest stretch tends to come after the first couple of settlements and before the last one. The early wins have happened, what is left are the bigger accounts, and the deposit carries on without much visible to show for it. This is where people stop.

Not everyone finishes a program. Circumstances change, the deposit turns out to be more than someone can sustain, or the credit damage stops feeling worth it.

Stopping halfway leaves you worse off than never starting, because by then the accounts have deteriorated and the balances have grown.

That is the honest risk, and it is better weighed now than in month eight.

What can go wrong

• A creditor sues you. Creditors keep the right to take a debt to court and some of them do. It is not the common outcome, but it happens often enough that you should know it is possible.
• A creditor will not negotiate. Some companies settle routinely and others rarely do. Nobody can promise you in advance that a particular creditor will accept a particular number.
• Forgiven debt can be taxable. If enough of a balance is cancelled it may be reported to the IRS as income. We do not give tax advice, so ask someone who does what it would mean in your case.
• The credit damage lasts a while. Settled accounts usually get reported as settled rather than paid in full, and that stays on your report for years.

What it costs, and when

Fees are worked out as a percentage of the debt you enroll. The part worth knowing is that a debt resolution company cannot legally charge you a fee before it has actually settled a debt for you. That comes from federal law under the FTC's Telemarketing Sales Rule rather than from any company's own policy, so if someone asks you for money up front just to enroll, you have learned something useful about them.

Because the fee only arrives alongside a result, what you end up paying depends on how much debt you enroll and how much of it gets resolved.

Who it is genuinely for

This suits someone with a real amount of unsecured debt, no plausible way of clearing it on the current terms, and enough income to keep up a monthly deposit for a few years. It does not suit someone who could pay it off themselves, or whose debt is secured, or who cannot sustain the deposit.

It also is not the only option available to you. A consolidation loan, a nonprofit credit counseling plan or bankruptcy might fit better depending on your situation, and we have compared the main routes in debt resolution, consolidation, or paying the minimum.

Shores Financial LLC provides debt resolution services for unsecured debt. We are not a law firm, a credit repair organization, or a lender, and we do not provide legal, tax, credit repair, or bankruptcy advice. We do not originate loans. Results vary based on individual circumstances, creditor participation, and your ability to complete a program; not all clients complete their program, and we cannot guarantee that any particular debt will be reduced by any specific amount or percentage. Using a debt resolution service may adversely affect your credit score and may result in collection activity or legal action by creditors. Services are not available in all states.