What is the catch to debt relief?

When debt feels unmanageable, it's natural to search for something — anything — that can help stop the financial freefall. And, over the past year, with interest rates still high, inflation driving up prices and credit card balances continuing to climb nationwide, more borrowers have been looking into their debt relief options as a potential path out of their expensive financial issues. But just as quickly as interest in these programs rises, so do the questions about what the fine print actually looks like.

And, that uncertainty makes sense. "Debt relief" is a broad term, and it can refer to everything from negotiating with your creditors on lower rates and fees to enrolling in a structured debt management program. Each option promises some form of financial relief, but the trade-offs can vary widely, especially when it comes to your credit score, tax liability and the total amount you'll pay over time. And the solutions marketed most aggressively online can sometimes be the most misunderstood.

So before signing up for anything, it's smart to understand exactly what you're getting into. Debt relief can absolutely help the right borrower, but like most financial tools, the benefits come with conditions. Below, we'll detail what those can be.

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What is the catch to debt relief?

The debt relief "catch" depends on the type of strategy you pursue, but most borrowers encounter at least a few common drawbacks. Here's what to know.

Debt settlement can hurt your credit before it helps. Debt settlement works by negotiating with creditors on a settlement amount that's less than what you owe. To get creditors to the table, though, many programs require you to stop making payments while negotiations take place, sometimes for months on end. That pause can result in late marks, collections and score drops before any settlement is reached. Your credit report may also reflect that the debt was settled for less than the full balance afterward, which can further impact your score.

You may owe taxes on forgiven debt. If a creditor forgives $600 or more, the Internal Revenue Service (IRS) typically considers the forgiven amount taxable income unless you qualify for a hardship exemption. That means a big settlement could result in a tax bill at the end of the year. It doesn't happen in every case, but it's something borrowers tend to overlook until tax season arrives.

Fees can eat into your savings. Legitimate debt relief companies only charge fees once a settlement is reached, but those fees tend to be high and can range from 15% to 25% of the enrolled debt. You'll still come out ahead in many cases, but the savings aren't always as large as the initial settlement number might suggest. And because you'll likely be paying into a dedicated account while negotiations take place, it can take time before a company settles your first debt.

Not all debts qualify. Most debt relief programs work only with unsecured debts like credit cards, medical bills or personal loans. If you're struggling with auto loans, mortgages or federal student loans, traditional relief programs may not apply.

Scams are a real concern. While many reputable debt relief firms exist, the industry also has its share of illegitimate operators, meaning companies that charge upfront fees, push unrealistic promises or advise borrowers to stop paying creditors without explaining the consequences. A good rule of thumb: If a program guarantees a specific outcome or promises your debt will disappear quickly, walk away.

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When is it still worth it to pursue debt relief?

Debt relief can be a smart and worthwhile option, even with these drawbacks, especially for borrowers who are on the edge of falling behind or who already have. For example, debt relief may be worth considering when:

Minimum payments aren't enough to make progress. If your balances aren't budging because interest keeps piling on, a structured settlement or negotiation may help you reduce what you owe and fast-track your exit.

You're already missing payments or facing collections. If your credit is already damaged, the credit-hit "catch" of settlement may not be as significant. In these cases, reducing the total debt may be more impactful than preserving your score in the short term.

Bankruptcy isn't the right fit. Some borrowers don't qualify for bankruptcy, or they want to avoid it for legal or personal reasons. Debt relief offers an alternative path that can still reduce your balances, often without the same long-term impact of bankruptcy.

You have mostly unsecured debt. Debt relief works best for high-rate unsecured debts like credit cards. If that describes your financial situation, debt settlement programs can result in meaningful reductions.

You need a structured, guided approach. For many borrowers, the hardest part of digging out of debt is simply having a plan and sticking to it. A reputable debt relief firm or credit counseling agency can provide a defined strategy and a monthly payment structure that's easier to follow than juggling multiple bills.

The bottom line

Debt relief isn't a magic solution, but it can be a practical one, especially if you're dealing with large, high-rate balances and need a structured way out. You'll need to understand the catches upfront, though, which include potential credit damage, taxes, fees and the time it may take to achieve a settlement. For the right borrower, those trade-offs may be worth it. For others, though, a different strategy may make more sense.