Resources: the official sources and the terms worth knowing

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.

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.

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.

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.

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.

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.

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.

Credit counseling

A free consultation, typically through an NFCC-affiliated nonprofit agency, reviewing your finances and explaining your realistic options, including a debt management plan.