6 common debt resolution myths busted

By Gina Freeman

Reviewed by James Heflin

May 31, 2024

Read time: 6 min

Young couple using a laptop while researching debt resolution programs

Key takeaways:

  • Not all online information about debt resolution is accurate.

  • These facts could help you make a more informed decision about your debt.

  • Debt resolution is one solution that might be right for you.

If you’re drowning in debt, falling behind on your payments, or dealing with a serious financial hardship, you’re likely looking for debt help now. You don’t have time for assumptions, rumors, or misconceptions about debt resolution. So let’s bust these six debt resolution myths and bring on the facts—so you can get the help you need to get your debt under control. 

Myth 1: Debt resolution ruins your credit score—permanently

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.

Many people believe that debt resolution does major, lasting damage to your credit score. 

Yes, enrollment into a debt resolution program will negatively impact your credit, but the impact may not be permanent, and here’s why.

People with lower credit scores and heavy debt experience less credit impact from debt resolution. This is partly because many have already fallen behind on their debt payments, and their credit score has already taken a hit. For example, a FICO simulation found that a 90-day past-due debt leads to a 113-133 point drop if a person starts with a 793 score. But only a 27-47 point drop if they’re starting at 607. 

Resolving collection accounts or charged-off accounts could help your credit standing. This is because in newer credit scores, the score calculation ignores collection accounts with a zero balance, including those that were resolved for less than the full amount. (Note that mortgage lenders may use an older credit score that takes collection accounts into consideration.)

As your credit card debts are resolved, your credit utilization ratio should improve. Credit utilization is the amount of credit card debt you have compared to the credit limits on your accounts, and it’s a big factor in credit scores. As your utilization comes down, your credit score should improve, assuming you’re avoiding new negative credit data (like late payments). This only works if you avoid new credit card debt while you’re working on paying down your existing debt. 

Resolving debt could make it easier to pay your debts on time in the future. This is important because keeping up with payments helps you build and maintain a strong credit profile. 

Debt resolution is a big hammer for serious debt problems. It’s a financial hardship option for people who are barely able to maintain their minimum monthly financial obligations. It’s not meant for people who can easily make at least their minimum payments each month.  

While debt resolution negatively impacts your credit standing, getting out of debt should be your first priority as that’s what will enable you to build a strong financial foundation. 

It’s best to pay your debts on time and in full. But when you can’t, resolving debt is likely better for your credit than leaving it unpaid—especially if you’ve fallen behind or suffered a significant financial hardship. 

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Myth 2: You can’t negotiate debt on your own for free

Anyone can negotiate with creditors and debt collectors, and many people do it successfully themselves. Your odds are better if you’re comfortable with the legal aspects of debt and debt collection, if you’re good at negotiating, and if you have the time and energy to dedicate. If you have several debts to resolve, you’ll also need to be organized and keep track of your progress for each account. 

Hiring a professional debt resolution service does offer some benefits. Debt help services such as Achieve have established relationships with major creditors and years of negotiating experience, as well as data and technology that can help them get good results for their members. But here's no reason you can’t try to negotiate debt yourself first—and then turn to the experts if needed. 

Myth 3: You have to pay taxes on forgiven debt

That’s true, but not all of the time. If you meet IRS guidelines for insolvency, you don’t have to pay federal income taxes on forgiven debt.

Insolvent means your debts exceed your assets. If what you owe is greater than what you own, you’re insolvent. Suppose that your house, personal property, and savings are worth $400,000. And your mortgage, car loans, credit cards and other debt total $450,000. This means you’re insolvent by $50,000, and you could get up to $50,000 of debt forgiveness tax-free. Insolvency is determined before you resolve your debts.

Please contact a qualified tax professional to discuss your situation and any potential tax consequences of debt forgiveness. 

Myth 4: Debt resolution only works for credit card debt

Debt resolution could work for any type of unsecured debt. It doesn’t work for secured debts like mortgages, car loans, or any other debt that’s guaranteed by something of value. You can negotiate medical debt, collection accounts, personal loan balances, and payday loans in addition to credit card debt. You can even negotiate debt after a lawsuit has been filed. 

Creditors and debt collectors are more likely to negotiate when they believe it’s the best option for their bottom line. 

Myth 5: Debt resolution is a quick fix

In most cases, debt resolution takes a while to pull off—particularly if you have a large amount of debt and multiple accounts. On average, someone who starts a debt resolution program enrolls $25,000 of debt across eight accounts. Debt negotiations sometimes involve offering to pay each creditor a lump sum that’s less than the full amount owed (other times, creditors agree to a series of payments).  In exchange, the creditor agrees to forgive the remaining balance.

People in deep debt trouble don’t usually have big chunks of cash lying around. So they have to save it up, and that takes time. 

In a debt resolution program, you make monthly deposits into a dedicated account to build up money for negotiations (this account is yours and you control it). Once you’ve built up enough funds, then your debt resolution company can make an offer to one of your creditors. If the creditor agrees, the debt resolution company presents the proposed agreement for your approval. After you approve it, the agreed amount is paid from your program account. The debt resolution company’s fee is also taken from the same account. This process continues for each creditor until all the debts are resolved—which takes 2 to 4 years for most people.

Myth 6: Debt resolution instantly stops all collection calls and letters

Shady debt resolution companies claim that they can instantly stop all contact from creditors when you sign up with them. That’s not true. The Federal Debt Collection and Practices Act requires debt collectors to stop contacting you if you ask them to. But the Act only covers debt collectors, not original creditors like your credit card issuer. 

Creditors will likely call you because they want to collect payment. If you are in a debt resolution program, you have a plan to resolve your debts—but that won’t keep your creditors from calling. Once your debt resolution has resolved a debt with a creditor, then they will consider the debt paid and the calls will stop. 

It’s not a great idea to cut off contact with your creditors or collectors, because doing so may leave them no option but to sue you. Keeping in touch with your creditor can’t prevent a lawsuit, but it gives you an opportunity to let them know what’s going on with your financial situation. Also, open communication could help you stay on top of the situation. If you want to write a cease-and-desist letter to a debt collector, you could do that on your own. 

Now that you know these debt resolution facts, you’re better equipped to decide how to handle your debt. And you can always talk to a debt expert for answers to your questions.

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

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