Debt Relief Glossary

Plain-language definitions of the terms you need to know before choosing a debt relief program, creditor, or repayment strategy.

Fact CheckedAdvertiser DisclosureWritten by: ReliefGuardian Editorial TeamReviewed by:

James Russell— Senior Debt Relief Specialist

1

1099-C

A tax form issued by creditors when $600 or more of debt is forgiven or cancelled. The forgiven amount is reported to the IRS as income in the year the settlement occurred. Consumers should consult a tax professional to understand potential tax liability and available exclusions.

A

Annual Percentage Rate (APR)

The true yearly cost of borrowing, expressed as a percentage. APR includes both the interest rate and any fees, making it more useful than the stated interest rate alone for comparing loan or credit card offers.

Automatic Stay

A court order that takes effect immediately when a consumer files for bankruptcy. The automatic stay temporarily halts most collection actions, lawsuits, wage garnishments, and creditor contact while the bankruptcy proceeding is active.

Amortization

The process of paying off a loan through regular, scheduled payments that cover both principal and interest. Early payments go mostly toward interest; later payments go mostly toward principal, following an amortization schedule set at the time the loan originates.

Annual Fee

A yearly charge some credit cards apply simply for having the account open, regardless of usage. Not to be confused with interest charges or late fees — an annual fee is billed automatically each year the account remains open.

B

Balance Transfer

Moving the outstanding balance of one credit card to another — typically to take advantage of a lower or 0% introductory APR. Balance transfers often carry a fee (usually 3–5% of the transferred amount) and revert to a higher rate when the promotional period ends.

Bankruptcy

A federal legal process that allows individuals or businesses to seek relief from debts they cannot repay. For consumers, the two most common types are Chapter 7 (liquidation) and Chapter 13 (reorganization). Bankruptcy is public record and remains on a credit report for 7–10 years.

C

Charge-Off

A creditor's declaration that an account is unlikely to be collected, typically after 180 days of non-payment. A charge-off is an accounting move by the creditor — it does not eliminate the debt. The consumer still legally owes the balance. Charged-off accounts are typically sold to debt collection agencies.

Chapter 7 Bankruptcy

A form of bankruptcy that discharges most unsecured debts within 3–6 months. Requires passing a 'means test' based on income. Some assets may be liquidated to pay creditors. Remains on a credit report for 10 years.

Chapter 13 Bankruptcy

A form of bankruptcy that creates a court-approved 3–5 year repayment plan rather than discharging debts immediately. Allows consumers to keep assets such as a home or car. Remains on a credit report for 7 years.

Cognitive Load

In the context of debt management, cognitive load refers to the mental burden of managing multiple accounts, due dates, creditors, and interest rates simultaneously. Debt consolidation is often pursued partly to reduce this burden.

Collection Account

A delinquent account that has been sold or assigned to a third-party debt collection agency after the original creditor charged it off. Collection accounts appear on credit reports and can significantly lower credit scores.

Consumer Financial Protection Bureau (CFPB)

A federal government agency that regulates consumer financial products and services, including debt collection, credit reporting, and debt relief companies. Consumers can file complaints about debt collectors and creditors at ConsumerFinance.gov.

Credit Counseling

A service provided by nonprofit agencies that helps consumers review their financial situation, develop a budget, and evaluate options including Debt Management Plans (DMPs). Reputable credit counseling agencies are accredited by the NFCC or FCAA.

Credit Score

A numerical score (typically 300–850) calculated from a consumer's credit history that reflects their creditworthiness. Payment history, credit utilization, length of credit history, types of credit, and new credit inquiries all influence the score. FICO and VantageScore are the most widely used models.

Credit Utilization

The percentage of available revolving credit currently in use. For example, a $3,000 balance on a $10,000 credit limit represents 30% utilization. Lower utilization generally benefits credit scores. Most experts recommend staying below 30%.

Creditor

A person or institution to whom money is owed. In the context of debt relief, creditors typically include credit card companies, banks, medical providers, and lenders that hold unsecured debt.

Cease and Desist Letter

A written request sent to a debt collector demanding they stop contacting you. Under the FDCPA, once a collector receives this letter, they may only contact you once more — to confirm they'll stop or to notify you of a specific action, such as a lawsuit.

Co-Signer

A person who agrees to be equally responsible for a loan or credit account alongside the primary borrower. If the primary borrower defaults, the co-signer is legally obligated to repay the debt, and it affects both parties' credit reports.

Credit Bureau

A company that collects and maintains consumer credit information and sells it to lenders, landlords, and other businesses. Equifax, Experian, and TransUnion are the three major U.S. credit bureaus.

Credit Freeze

A free security measure that restricts access to your credit report, making it harder for identity thieves to open new accounts in your name. A freeze can be lifted temporarily or permanently by the consumer at any time.

Related: Credit Bureau

Credit Repair

Services or strategies aimed at improving a consumer's credit report, typically by disputing inaccurate information with credit bureaus. Legitimate credit repair cannot remove accurate negative information — only genuine errors can be disputed successfully.

Credit Repair Organizations Act (CROA)

A federal law that regulates credit repair companies, prohibiting them from charging fees before services are fully performed and requiring specific written disclosures about consumer rights before any contract is signed.

Credit Report

A detailed record of a consumer's credit history maintained by credit bureaus, including account balances, payment history, credit inquiries, and public records like bankruptcies. Consumers are entitled to a free copy from each bureau annually.

Related: Credit Bureau, Credit Score

D

Debt Avalanche

A debt payoff strategy that directs extra payments to the account with the highest interest rate first, while making minimum payments on all other accounts. Mathematically optimal — saves the most money in interest over time.

Related: Debt Snowball

Debt Collector

A third party hired by or that purchased debt from an original creditor to collect a past-due balance. Debt collectors are regulated by the Fair Debt Collection Practices Act (FDCPA), which prohibits harassment, deceptive practices, and calling at unreasonable hours.

Debt Consolidation

The process of combining multiple debts into a single loan or payment, ideally at a lower interest rate. Unlike debt settlement, consolidation does not reduce the amount owed — it restructures how it is repaid.

Debt Management Plan (DMP)

A structured repayment program offered by nonprofit credit counseling agencies. The agency negotiates reduced interest rates with creditors, and the consumer makes a single monthly payment to the agency, which distributes funds to creditors. The full balance is repaid — at lower rates. Typically takes 3–5 years.

Debt Settlement

A process in which a consumer or debt relief company negotiates with creditors to accept a lump-sum payment for less than the full balance owed. Typically results in settling debts for 40–60 cents on the dollar. Also called debt relief or debt resolution.

Debt Snowball

A debt payoff strategy that directs extra payments to the account with the smallest balance first, regardless of interest rate. Provides motivational 'quick wins' as accounts are eliminated. May cost more in total interest than the avalanche method.

Related: Debt Avalanche

Debt-to-Income Ratio (DTI)

The percentage of gross monthly income that goes toward debt payments. Calculated by dividing total monthly debt payments by gross monthly income. Lenders use DTI to evaluate creditworthiness. A DTI above 43% typically makes it difficult to qualify for new financing.

Default

Failure to meet the legal obligations of a loan or credit agreement — most commonly, missing payments. Defaulting triggers late fees, potential legal action, and significant damage to a credit score.

Delinquency

A loan or account that is past due but has not yet been charged off. Delinquency is typically reported to credit bureaus after 30 days of non-payment, and the negative impact increases at 60-day and 90-day marks.

Related: Charge-Off, Default

Debt Buyer

A company that purchases delinquent or charged-off debt from original creditors, usually for a small fraction of the balance owed, and then attempts to collect the full amount from the consumer directly.

Related: Debt Collector, Charge-Off

Debt Validation Letter

A written request a consumer sends to a debt collector demanding proof of the debt's amount and the collector's legal right to collect it. Collectors must pause collection efforts until they respond, per the FDCPA.

Deficiency Balance

The remaining unsecured debt left over after a secured asset (like a repossessed car) is sold and the proceeds don't cover the full loan balance. The lender can still pursue the consumer for this remaining amount.

E

Enrolled Debt

The specific debts a consumer chooses to include in a debt settlement program. The total enrolled debt amount is the basis on which most debt relief company fees are calculated.

Related: Debt Settlement, Program Fee

F

Fair Debt Collection Practices Act (FDCPA)

A federal law that governs how third-party debt collectors may attempt to collect debts. Prohibits harassment, false representations, and unfair practices. Collectors must provide written validation of the debt upon request. Violations can result in lawsuits against the collector.

FICO Score

The most widely used credit scoring model, developed by Fair Isaac Corporation. Scores range from 300–850. Used by approximately 90% of top lenders. The five factors are: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).

Related: Credit Score, VantageScore

Forbearance

A temporary agreement between a borrower and lender to pause or reduce payments due to financial hardship. Forbearance is not forgiveness — the missed or reduced payments are typically added to the end of the loan.

Forgiven Debt

The portion of a debt that a creditor agrees to cancel in a settlement. The IRS may treat forgiven debt as taxable income, requiring the creditor to issue a 1099-C form for amounts over $600. The insolvency exclusion may reduce or eliminate the tax liability for some consumers.

G

Garnishment

A legal process by which a creditor with a court judgment can require an employer or bank to withhold a portion of a debtor's wages or funds to satisfy the debt. Federal law limits wage garnishment to 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage, whichever is less.

Grace Period

A set number of days after a payment due date during which a payment can still be made without triggering a late fee or negative credit reporting. Grace periods vary by creditor and account type.

H

Hardship Program

A temporary arrangement offered directly by creditors to consumers experiencing financial difficulty. May include reduced interest rates, waived fees, or lower minimum payments. Enrolling in a creditor's hardship program is different from enrolling in a debt relief company's program.

Hard Inquiry

A credit check that occurs when you apply for new credit, such as a loan or credit card. Hard inquiries can cause a small, temporary dip in your credit score and remain on your report for about two years.

Related: Credit Score, Soft Inquiry

I

Insolvency Exclusion

An IRS provision that allows taxpayers to exclude forgiven debt from income to the extent they were insolvent at the time of settlement. Insolvent means total liabilities exceed total assets. Consumers who qualify may not owe taxes on forgiven amounts. Consult a tax professional.

Related: Forgiven Debt, 1099-C

Installment Loan

A loan repaid through a fixed number of scheduled payments over a set term, such as a personal loan, auto loan, or mortgage — as opposed to revolving credit, which has no fixed end date.

Related: Revolving Credit

Interest Rate

The percentage a lender charges for the use of borrowed money, expressed as an annual rate. Distinct from APR, which also factors in fees — the interest rate alone reflects only the cost of borrowing the principal.

Related: Annual Percentage Rate (APR)

J

Judgment

A court order that legally confirms a debt is owed. After obtaining a judgment, a creditor gains enhanced collection tools including wage garnishment, bank levies, and property liens. Most creditors must sue and win a court case before obtaining a judgment.

L

Lien

A legal claim against property — such as a home or vehicle — that secures a debt. Creditors who obtain court judgments can in some cases place liens on real property, which must be satisfied before the property can be sold or refinanced.

Related: Judgment

Late Payment

A payment made after its due date. Most creditors report a payment as late to credit bureaus once it's 30 days past due, which can significantly affect a credit score depending on how far past due it becomes.

Related: Delinquency, Credit Score

M

Minimum Payment

The smallest amount a cardholder must pay each billing cycle to keep an account in good standing. Paying only the minimum on high-interest accounts can result in paying far more than the original balance over time and taking decades to repay.

Means Test

A calculation used in Chapter 7 bankruptcy that compares a filer's income to their state's median income to determine eligibility. Filers who don't pass the means test may be required to file Chapter 13 instead.

N

Nonprofit Credit Counseling

Credit counseling services provided by agencies organized as nonprofit entities, typically accredited by the NFCC or FCAA. Nonprofit agencies are generally prohibited from charging excessive fees and must disclose their services before charging.

O

Original Creditor

The company or institution that originally extended credit to the consumer — such as a credit card company, bank, or medical provider. Distinct from a debt collector, who purchases or is hired to collect on past-due accounts.

P

Program Fee

The fee charged by a debt relief company for their services. Industry standard is 15–25% of the enrolled debt balance. Under FTC regulations, fees can only be charged after a settlement is reached and approved by the consumer — not upfront.

Related: Enrolled Debt, Debt Settlement

Penalty APR

A significantly higher interest rate a credit card issuer may apply after a missed or late payment, as allowed under the card's terms. Penalty APRs can sometimes exceed 29%, well above the account's standard rate.

R

Repossession

The seizure of collateral — typically a vehicle — by a lender after a borrower defaults on a secured loan. Repossession can happen with little notice depending on state law and the loan agreement's terms.

Revolving Credit

A type of credit, like a credit card, that allows repeated borrowing up to a set limit as the balance is paid down, with no fixed end date — unlike an installment loan, which has a defined payoff schedule.

S

Secured Debt

Debt backed by collateral — an asset the lender can repossess if payments are not made. Common examples include mortgages (secured by a home) and auto loans (secured by a vehicle). Secured debts are generally not eligible for debt settlement programs.

Related: Unsecured Debt

Settlement Percentage

The percentage of the original balance that a creditor agrees to accept in a settlement. For example, settling a $10,000 balance for $4,500 represents a 45% settlement (or 55 cents forgiven on the dollar). Industry averages typically range from 40–60% of enrolled balances.

Related: Debt Settlement, Forgiven Debt

Statute of Limitations (SOL)

The period during which a creditor can sue a consumer to collect a debt. After the SOL expires, a creditor can no longer obtain a court judgment — though the debt still exists and can still appear on a credit report. SOL periods vary by state and debt type, typically ranging from 3–10 years.

Related: Judgment, Debt Collector

Soft Inquiry

A credit check that does not affect your credit score, such as checking your own credit report or a pre-qualification check by a lender. Soft inquiries are not visible to other lenders.

Related: Hard Inquiry, Credit Score

T

Telemarketing Sales Rule (TSR)

An FTC regulation that prohibits debt relief companies from charging fees before settling or resolving a consumer's debt. The rule also requires companies to make specific disclosures about program costs, results, and consumer rights before enrollment.

Time-Barred Debt

Debt that is past the statute of limitations for legal collection in a given state. Creditors can still attempt to collect time-barred debt, but generally cannot successfully sue for it — though making a payment can sometimes restart the clock.

Related: Statute of Limitations (SOL)

U

Unsecured Debt

Debt not backed by any collateral. If a consumer defaults, the creditor has no asset to repossess. Common examples include credit cards, medical bills, personal loans, and payday loans. Unsecured debt is generally what qualifies for debt settlement programs.

Related: Secured Debt, Debt Settlement

V

VantageScore

A credit scoring model developed jointly by Equifax, Experian, and TransUnion as an alternative to FICO. Scores range from 300–850 and use similar factors to FICO, though the weighting differs slightly. Increasingly used by lenders alongside or instead of FICO scores.

Related: FICO Score, Credit Score

Z

Zombie Debt

Old debt — often past the statute of limitations or already discharged in bankruptcy — that resurfaces when sold to a new collector attempting to collect on it, sometimes years after the original account went unpaid.

Related: Time-Barred Debt, Debt Buyer

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