How does debt resolution work?

Got debt? Struggling to make even the minimum payments? Take a breath. There are solutions. You just need the right one. 

Debt resolution is one possibility to consider. When you resolve debt on your own or with professional help, you pay it off for less than what's owed. It's not a silver bullet, but it could help you get some breathing room. 

Let's look at how debt resolution works, who it might be good for, and how long it takes to get rid of debts.

The debt resolution process

There are generally two paths you can take to resolve debt. You can negotiate debts yourself, or work with a professional debt resolution company. 

Here's how the process typically goes if you're working with a company: 

• You get a personal debt assessment with a licensed debt consultant—reputable companies provide this evaluation for free. You provide details about your debts (including how much you owe and to whom), your necessary expenses (such as your monthly rent or mortgage payment, groceries, gas, utilities), and your income. The debt consultant will use this information to design a custom plan based on what you can afford to pay on your debts and how long the program will take.

• Once in the program, you make an affordable monthly payment—this money goes into a special account that's set up just for negotiating and paying your debts. You own the account, and you always have access to it. As the funds build up in your account, the debt resolution company will start negotiations with your creditors.

• Expert negotiators work on your behalf to reach agreements with your creditors to reduce what you owe. 

• Once an agreement is reached with a creditor, the details are presented to you for your approval. If you agree to the negotiated settlement, the money in your special account is used to pay your creditor. The creditor then closes out the debt and considers it resolved, or settled. Creditors sometimes ask for a lump sum, and other times agree to a series of payments.

• The debt resolution company's fee is then paid from the same special account. You and your debt resolution team can then start working on your next debt. This process continues until all the debts you included in the program have been resolved.

If you choose to DIY debt negotiation, you handle the negotiations yourself. Also, you'd need to think beforehand about the settlement offers you want to make and make sure you have money ready when your offers are accepted.

Why would creditors be willing to negotiate? Creditors may agree to take less than what you originally owed if you are experiencing a financial hardship that makes it unlikely that you could fully repay the debt. Financial hardships could include:

• Divorce

• Job loss or reduced income

• A medical emergency

• A large unexpected expense (such as replacing your roof or a costly car repair) 

Often, people seeking debt resolution are already behind on their payments. For the creditor, getting something is better than getting nothing, so they may agree to accept a lower amount. 

What kinds of debt can be resolved?

Debt resolution is usually limited to unsecured debts. Unsecured debt can include:

• Credit cards

• Retail store cards

• Medical debt

• Personal loans

• Installment loans

• Collections or repossessions

• Lines of credit

• Some payday loans

Not all debts can be resolved for less than the full amount. For example, if you can't afford your car loan, the lender will probably repossess the car. Debt resolution also can't help with taxes, utility bills, or lawsuits. If you're behind on monthly payments for a mortgage or federal student loan, you should talk to your lender about other solutions to financial hardship.

Can anyone do debt resolution?

Whether debt resolution is a good idea depends on what kind of debt you have, how much you owe, and how much income you have to apply toward your debts. Creditors will also want to know about your financial hardship, how serious it is, and how long you expect it to last. If you can't afford to repay your debts without at least some degree of forgiveness, debt resolution might be a realistic option.

Some debt resolution companies require that you enroll a minimum amount of debt. For example, Achieve Resolution is available to people who enroll at least $7,500 in unsecured debts.

How long does debt resolution take?

Most people who enter a professional debt resolution program could complete it in two to four years. Your timeframe for resolving debt depends on how much you owe, how willing creditors are to negotiate, and how quickly you can save enough money to make an offer your creditors will accept. 

How much does professional debt resolution cost? 

Generally, you can expect to pay anywhere from 15% to 25% of the total amount of debt enrolled in a resolution program. For example, say you enroll $20,000 in unsecured credit card debt. If the debt resolution company charges 20%, the fee is $4,000. These fees are generally built into your debt resolution program—they're included in the monthly program deposits you make into your special account. 

By law, no debt resolution company can earn any fees until these three things have happened:

1. They have negotiated an agreement with a creditor 

2. You have approved that agreement

3. At least one payment has been made to the creditor from your special account

In other words, a reputable debt resolution company will only take their fees once they have successfully resolved a debt for you. The goal of any professional debt resolution company is to significantly reduce what you owe. Achieve Resolution offers a program guarantee—if the total program settlement cost is more than your total enrolled debt, Achieve will refund you the difference from our collected fees, up to 100%.

What are the potential downsides to debt resolution?

Debt resolution can provide relief. But it isn't a magic wand. You should understand the potential negative consequences before you make your choice.

Debt resolution and your credit 

Achieve isn't a credit repair organization and doesn't provide or offer services or advice to repair, modify, or improve your credit.

There's an impact to your credit profile to consider when you're evaluating whether to pursue debt resolution. Once in a debt resolution program, some people choose to stop making payments on their debts while they build up funds for settlement offers. Payment history influences your credit profile more than any other factor. If you miss payments for any reason, your credit standing could suffer. 

Many people struggling with a significant debt load and financial hardship have already fallen behind on their monthly payments and their credit profile has already taken a hit—even before seeking help with debt resolution. But if you have a high credit score and stop making payments, your score could drop a lot.

Later, when you successfully resolve a debt, it could show up on your credit report as "paid-settled." "Paid-settled" is better than unresolved delinquencies, but it's not as good as "paid as agreed."

If you have a low credit score when you resolve a debt, it's possible for your credit profile to improve if the agreement helps you knock out a collection account.  

In any case, credit scores are fluid. They can and do change every time new data shows up on your credit report, including the passage of months and years. The effect of negative information on your credit reports lessens as the information ages. Eventually, settled debts stop affecting your credit standing entirely.

Debt resolution and collections

The second potential downside to debt resolution is that it can't stop collection efforts, including lawsuits. Your creditor may withdraw a lawsuit once they know you're trying to negotiate debts. But they're not required to. 

A reputable debt resolution company has the tools and the expertise to work with creditors to try to avoid lawsuits. Achieve, for example, partners with attorneys who specialize in debt negotiation. If an enrolled creditor files a lawsuit against a member, Achieve may engage an attorney for the purpose of negotiating an agreement with that creditor. There is no cost to the member for this benefit.

Is forgiven debt taxable?

Forgiven debt could be taxable unless you qualify for an exclusion. The IRS cuts you a break from having to declare forgiven debt as income if you're insolvent. Insolvent means that your debts (before any amounts were forgiven) are worth more than the fair market value of what you own. Talk to a tax professional to find out whether you meet the IRS criteria. 

Alternatives to debt resolution

Resolving debt is just one strategy for getting rid of overwhelming debt. You could also consider a debt management plan (DMP) or bankruptcy. 

A debt management plan (DMP) is a set schedule for paying off debts in full, managed by a nonprofit credit counseling agency. A DMP won't reduce what you owe, but you might be able to get lower interest rates or get some fees waived. You'll probably have to stop using credit cards while you're in the plan. DMPs take three to five years to complete. Most people don't complete their DMP, typically because the required payment is very high.

Bankruptcy for individuals is usually either Chapter 7 or Chapter 13:

• Chapter 7 bankruptcy wipes the slate clean on eligible debts. In exchange, you might have to give up some assets. Not everyone qualifies. If the court determines that you can afford a monthly payment, you'll be enrolled in Chapter 13 instead.

• Chapter 13 bankruptcy requires that you pay all of your disposable income toward your debts for three years if you are low-income, or five years if you aren't. You don't have to sacrifice any assets. 

Talk to a debt expert who can help you figure out the best way to handle your debt situation.