What Are the Side Effects of a Debt Relief Program?

Key Takeaways

• Debt relief programs have real side effects but they are temporary, manageable, and in most cases far less severe than the alternatives. Your credit score will likely drop during the program, but most clients see recovery within 12 to 18 months of completion. The IRS insolvency exclusion means many consumers owe little or nothing in additional taxes on forgiven debt. Understanding the full picture before you start is the best way to avoid surprises.

If you're considering a debt relief program, you've probably already read a dozen articles telling you it's either the best thing you could possibly do or the worst mistake of your financial life. The truth, as usual, lives somewhere in the middle. Debt settlement programs have genuine side effects that every consumer should understand before enrolling. But those side effects are often exaggerated by people who either don't understand the process or have a financial incentive to steer you toward a different product.

At The Debt Relief Company, we believe the best client is an informed client. We'd rather you understand exactly what you're signing up for and make the decision that's right for your specific situation than enroll in a program based on incomplete information. So, let's walk through what actually happens when you enter a debt relief program — the credit score impact, the tax implications, the collection calls, the account closures, and everything in between — so you can weigh the trade-offs with your eyes wide open.

How Does Debt Settlement Affect Your Credit Score?

This is the side effect that causes the most anxiety and, quite frankly, the most misunderstanding. Will a debt relief program hurt your credit score? In most cases, yes — at least temporarily. Here's the mechanism behind it.

In a typical debt settlement program, you stop making monthly minimum payments to your creditors and instead deposit funds into a dedicated savings account (FDIC-insured trust account in your name). Those funds accumulate over time and are used to negotiate lump-sum settlements with your creditors for less than the full balance owed. During the period where you're not making payments — which can last until the accounts get settled — late payment marks will appear on your credit report. Payment history accounts for approximately 35% of your FICO score, which is the single largest factor in the scoring model. According to FICO, a single 30-day late payment can reduce a credit score in the 700 range by 60 to 110 points, depending on the rest of your credit profile (Source:myFICO). Due to this, you should expect a negative impact to your credit score.

However — and this is the part that most scare-tactic articles conveniently leave out — the credit score impact is temporary. Once your debts are settled and the accounts show a zero or settled balance, the negative pressure on your score begins to ease. Most of our clients see meaningful credit score recovery within 12 to 18 months of completing their program. Some recover even faster, particularly if they take proactive steps to rebuild their credit afterward (i.e., opening a secured credit card, keeping utilization low on any remaining accounts, making all payments on time going forward, using tools like Experian Boost to get credit for utility and subscription payments, etc.).

It's also worth asking yourself an honest question: what is the alternative? If you're carrying $25,000 or more in credit card debt at today's average APR of 22.76% (Source: Federal Reserve Q4 2025) and can barely afford minimum payments, your credit score is already under significant pressure. Chronic high utilization — which is the second largest factor in your FICO score at roughly 30% — potential missed payments, and the stress of an unsustainable debt load are all actively damaging your credit. They're just doing it more slowly and less visibly than a debt settlement program would. And if the alternative is bankruptcy, the credit impact is dramatically worse: a Chapter 7 bankruptcy remains on your credit report for 10 years versus 7 years for a settled account, and the settled account's impact diminishes well before it falls off.

What Happens to Your Credit Card Accounts

When you enroll credit card accounts in a debt relief program, those accounts will eventually be closed by the creditor. This is not something the debt relief company does to you — it's a natural consequence of non-payment on the account. After a certain period (typically 60 to 90 days of missed payments), the issuer will freeze or close the account. You will no longer be able to use those cards for purchases.

For many consumers, this feels like a loss. But consider it from a different angle: if you're enrolling in a debt relief program because your credit card debt has become unmanageable, continuing to use those cards would only make the problem worse. We actually think of the account closures as a guardrail that prevents you from digging a deeper hole while you're trying to climb out of the one you're already in. It’s a blessing not a loss.

There is a credit score implication here as well. Closing credit card accounts reduces your total available credit, which can increase your credit utilization ratio in the short term. It can also reduce the average age of your credit accounts if the closed cards were among your oldest. These effects are real but, once again, temporary. As you settle debts and reduce your total balances to zero, your overall utilization ratio improves — often dramatically. And the account history remains on your credit report for up to 7 years after closure, so the length-of-history impact is gradual rather than sudden.

Debt Relief Tax Consequences: Understanding the 1099-C

This is probably the most misunderstood side effect of debt settlement, so let's be very precise about the mechanics. When a creditor agrees to accept less than the full balance you owe, the amount that is forgiven — the difference between what you owed and what you actually paid — may be considered taxable income by the IRS. If the forgiven amount exceeds $600, the creditor is required to issue you a 1099-C (Cancellation of Debt) form, and the IRS expects you to report that amount as income on your tax return for the year in which the debt was settled.

Let's put some real numbers to it. Say you owed $18,000 on a credit card and settled it for $9,000 (a 50% settlement, a ballpark estimate roughly in line with industry averages). The forgiven amount is $9,000. You could receive a 1099-C for $9,000, and at a 22% marginal federal tax rate, that would translate to approximately $1,980 in additional taxes. That's real money, and you should absolutely factor it into your decision.

However, there is a critical exception that most articles either gloss over or bury in a footnote: the IRS insolvency exclusion. Under IRS Form 982, if your total liabilities exceed your total assets at the time the debt was forgiven — in other words, if you were technically insolvent — you can exclude some or all of the forgiven debt from your taxable income (Source: IRS Publication 4681). Given that most consumers who enroll in debt settlement programs are, by definition, in financial distress with liabilities exceeding assets, a significant percentage qualify for this exclusion and owe little or nothing in additional taxes. We always recommend consulting with a tax professional about your specific circumstances, but the 1099-C tax bill is often far less severe than it initially appears on the surface.

Collection Calls and Creditor Contact During the Program

Once you stop making payments to your creditors, they will attempt to contact you. This typically starts with automated calls, text messages, and letters, and can escalate to contact from the creditor's internal collections department or, eventually, third-party debt collectors. We won't sugarcoat this one — dealing with collection calls is stressful and unpleasant. It's definitely one of the side effects that causes some discomfort during a debt relief program.

With that being said, it’s just some phone calls. And as a consumer you have significant legal protections from those phone calls. The Fair Debt Collection Practices Act (FDCPA) prohibits third-party collectors from calling you before 8 a.m. or after 9 p.m. in your time zone, using threatening or abusive language, contacting you at work if you tell them not to, or misrepresenting the amount you owe. You also have the right to request that a collector cease all contact by sending a written notice. Once you're enrolled in a debt relief program, your provider can often help manage creditor communications, and in many cases creditors will direct their inquiries to the debt relief company rather than contacting you directly.

It's also important to understand that collection calls don't last forever. They tend to be most intense during the 60 to 180 day window after payments stop. Once accounts are settled, charged off, or sold to a third party, the frequency drops dramatically. For most clients, the period of active collection contact represents a relatively small portion of the overall 24 to 48 month program timeline.

Can You Get Sued During a Debt Relief Program?

Can a creditor sue you for an unpaid credit card balance? Yes, they can. Does it happen to every client? Not even close. Lawsuits are more common for larger individual balances (typically $5,000 or more) and from certain creditors and collection law firms who are more litigation-prone than others. According to a survey from the Consumer Financial Protection Bureau, approximately 15% of consumers with debts in collection reported being sued (Source: CFPB Debt Collection). That figure is likely lower among consumers actively enrolled in a settlement program, since creditors understand that a settlement offer is forthcoming.

Even when a lawsuit is filed, it often results in a negotiated settlement rather than a court judgment. In many cases, the filing of a lawsuit actually accelerates the settlement process because it motivates both parties to reach a resolution. At The Debt Relief Company, we monitor all enrolled accounts for legal activity and work proactively with clients and creditors to resolve accounts before litigation becomes necessary. If a lawsuit does come through, we help clients understand their options, which may include negotiating a settlement directly with the creditor's legal team. The vast majority of our clients complete their programs without ever seeing the inside of a courtroom, but it is a possibility you should be aware of nonetheless.

How Long Do the Side Effects of Debt Relief Last?

This is the question that matters most, and the answer is more encouraging than most people expect. The active side effects — credit score decline, collection calls, account closures, and the stress that comes with the uncertainty — are concentrated during the program itself, which typically runs 24 to 48 months depending on the amount of debt enrolled and how quickly settlements are reached. Once the program is complete and all debts are resolved, the recovery phase begins.

Most clients see their credit scores return to pre-program levels (or better) within months of program completion. The settled accounts gradually age on the credit report, with their negative impact diminishing each year. And the financial benefit — the elimination of tens of thousands of dollars in high-interest debt — is permanent. We've worked with clients who entered their program with credit scores in the low 500s and rebuilt to the high 600s or low 700s within months of completion, simply by maintaining good financial habits after the program ended. It takes discipline, but the math absolutely works in your favor once the debt is gone. It’s also important to note that everyone’s impact to credit is completely different and we don’t set any expectations with regards to credit for that exact reason.

Debt Relief Side Effects Compared to the Alternatives

No conversation about the side effects of debt relief is complete without comparing them to what happens when you don't do debt relief. If you're carrying significant credit card debt, the real question isn't "does debt relief have side effects?" It's "are those side effects better or worse than the path I'm currently on?"

The minimum payment trap is perhaps the most quietly destructive alternative, because it feels safe while devastating your finances over time. If you're making minimum payments on $30,000 in credit card debt at 24% APR, you'll be paying for more than 30 years and spend over $60,000 in interest alone — more than double the original balance (Source: Federal Reserve Min Payment). Your credit score stays technically intact, sure, but your financial life remains in a stranglehold for decades. That is what we call the vicious cycle of revolving debt, and it is by far the most expensive option available to most consumers.

Bankruptcy eliminates debt completely but stays on your credit report for 7 to 10 years and becomes public record. It can affect your ability to rent an apartment, obtain certain professional licenses, and secure affordable insurance premiums. Debt management plans through credit counseling agencies preserve your credit score better but require you to repay the full principal amount (just at a reduced interest rate), which means you save considerably less overall. Debt consolidation loans can work beautifully if you qualify for one, but most consumers carrying significant credit card debt don't have the credit score necessary to get a consolidation loan with a meaningfully lower interest rate — the classic catch-22 of credit that we've written about extensively.

Is Debt Relief Worth the Consequences?

We're obviously biased here — we run a debt relief company, after all, and we've never been shy about admitting that. But we also believe deeply in being transparent about trade-offs, which is what this entire article has been about. Debt relief is not right for everyone. If you have a stable income and can realistically pay off your credit card debt within 2 to 3 years through disciplined budgeting and accelerated payments, that's almost certainly the better path. If preserving your credit score in the short term is essential because you're planning to buy a home or refinance within the next 12 months, a debt management plan or balance transfer strategy may serve you better.

But if you're carrying $15,000, $25,000, $50,000 or more in unsecured credit card debt at interest rates above 20%, and you're struggling to make even minimum payments each month, the calculation changes dramatically. In that scenario, the temporary side effects of a debt relief program — a credit score dip that recovers, some collection calls that eventually stop, a tax consideration that often resolves itself through the insolvency exclusion — are a small price to pay for eliminating the debt entirely in 2 to 4 years and saving tens of thousands of dollars in interest that would have otherwise gone straight to the banks.

Every financial hardship is different, and there is no one-size-fits-all answer to the question of whether debt relief is worth it. What we can tell you from years of working with consumers in exactly this position is that the side effects of a debt relief program, while real, are temporary and manageable. The debt itself, if left unaddressed, is neither. That's the trade-off in its simplest form — and only you can decide which side of it makes more sense for your life.