Debt Relief: What It Is And When to Consider It

For some people, debt can accumulate to the point where it becomes unmanageable. Missed credit card or loan payments and accumulating interest charges can make you feel like you’re trapped in a never-ending cycle where it feels impossible to catch up. In a situation like this, debt relief may be worth considering.

Debt relief isn’t a single solution – it’s a broad term that covers different strategies designed to make debt easier to manage.

Below, we’ll review common debt relief options and explain how they work so you can decide if any of these choices are right for you.

What Is A Debt Relief Program?

A debt relief program is any strategy or service designed to help people manage, reduce or repay debt more efficiently. These programs may lower interest rates, combine multiple balances into one payment or negotiate repayment terms. In some cases, a debt relief program may reduce the amount owed altogether.

Debt relief can apply to many forms of debt, including:

Debts that typically cannot be included in a debt relief program include:

Some debt relief methods are self-managed, such as using a balance transfer card or taking out a consolidation loan. Others involve outside organizations, including nonprofit credit counseling agencies, debt settlement companies or bankruptcy attorneys.

There are different reasons you might need debt relief:

Different debt relief programs carry different benefits, risks and drawbacks. It’s important to understand your options so you can choose the best route to address your debt problem.

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How Do Debt Relief Programs Work?

Here’s an overview of common debt-relief options.

Debt Consolidation Loans

A debt consolidation loan combines multiple debts into a single new loan, ideally with a lower interest rate. Instead of juggling several monthly payments, you make one fixed payment each month.

Applying for a debt consolidation loan may temporarily lower your credit score due to a hard inquiry, but these usually result in a credit score drop of under five points. And if you make your loan payments on time every month, that could actually help your credit score improve.

Debt consolidation loan costs can vary. These person loans typically come with origination fees, which typically range from 1% – 12% of the amount you’re borrowing. You’ll also be charged interest on your loan, and your rate will generally depend on factors like your credit score, the amount you’re borrowing and your repayment period.

A debt consolidation loan may be suitable for you if you have good credit (usually a score of 670 or higher) and a steady income to make loan payments. You may qualify for a debt consolidation loan with fair credit (a score of 580 – 669), but you may not qualify for as competitive an interest rate.

Balance Transfer Credit Cards

Balance transfer cards allow borrowers to move existing credit card balances onto a new card. These cards often come with a temporary 0% introductory annual percentage rate (APR), which can help more of each payment go toward the principal balance instead of interest.

Opening a new credit card may temporarily affect your credit score due to a hard inquiry. But as is the case with a consolidation loan, making timely payments could help your credit score improve.

Most of these cards charge a balance transfer fee, typically around 3% – 5% of the transferred amount. While you may enjoy a 0% APR for a period of time (usually about 12 – 21 months), once that introductory period ends, your balance will generally be subject to the card’s regular APR, which may be considerable.

A balance transfer may be suitable for you if you expect to pay off your balance during your card’s promotional period and you qualify for a card with a longer introductory period.

Debt Management Plans

Debt management plans are typically offered through nonprofit credit counseling agencies. These agencies work with creditors to lower interest rates or waive certain fees, while the borrower makes a single monthly payment to the agency.

With a debt management plan, you typically close the accounts you owe money on while you make your monthly payments through your enrolled program. Closing those accounts could have an impact on your credit score, especially if they’re older, since the length of your credit history plays a role in calculating your score. But timely payments could help your credit score over time.

You may be looking at a modest fee to set up a debt management plan, somewhere in the ballpark of $50. You may also pay monthly maintenance fees of $30 – $100.

A debt management plan may be a good solution for you if you’re struggling with high-interest debt and have a steady income that makes it possible to keep up with your payments.

Debt Settlement

Debt settlement involves negotiating with creditors to accept less than the full amount owed. Debt settlement companies generally tell enrollees to stop making payments toward their debt and instead deposit money into a dedicated account until enough funds accumulate to negotiate a settlement.

Although debt settlement could reduce the amount you owe, it could also have a more significant impact on your credit score than the options above. Settled accounts are generally reported to the credit bureaus. And they can stay on your credit report for up to 7 years.

The cost can also be high. It’s common for debt settlement companies to charge a fee of 15% to 25% of the debt you have enrolled in the program. So, if you use a debt settlement company to settle $30,000 of debt, they might take a fee of $4,500 – $7,500. You should also know that any portion of your debt that’s forgiven may be considered taxable income.

Debt settlement is worth considering if you’re very delinquent on your debt and can’t realistically repay it in full but you also don’t want to file for bankruptcy.

Hardship Programs

Some lenders and credit card companies offer temporary hardship assistance directly to borrowers facing financial difficulties. These programs may reduce interest rates, pause payments or alter repayment terms.

If you’re able to qualify for one of these programs, you may be able to avoid credit score damage if you get in touch with your lender or credit card issuer before missing a payment.

There’s generally no cost to enroll in one of these programs if your lender or credit card issuer offers one.

A hardship program may be a good choice if you’re experiencing a temporary financial hardship, such as being out of work. Keep in mind that these programs may allow you only to pause payments or to qualify for a lower interest rate for a limited period.

Bankruptcy

Bankruptcy is a legal process that can discharge certain debts under Chapter 7 or reorganize debts under a court-supervised repayment plan under Chapter 13. And it could have a severe impact on your credit.

A Chapter 7 bankruptcy could stay on your credit report for up to 10 years, while a Chapter 13 could stay on your credit report for up to seven years. During this time, you may struggle to borrow money, since bankruptcy can cause a lot of credit score damage.

Filing for bankruptcy can also be costly. If you need to hire an attorney, which is generally recommended (though technically not required), you might pay $1,250 to $2,200 for a Chapter 7 bankruptcy or $3,125 to $6,250 for a Chapter 13 bankruptcy. But fees can vary based on your circumstances and where you live.

The good news is that, unlike debt settlement, debts discharged through bankruptcy are generally not taxable.

Bankruptcy is often considered a last resort for debt relief due to the severe impact on credit scores and potentially high costs. But it may be worth considering if you’re very behind on your debt and don’t have a realistic path for paying it off.

Debt Relief Scams

While there are plenty of legitimate debt relief companies, there are also some predatory companies that try to take advantage of consumers. Warning signs of a debt relief scam include:

Carefully research any company whose debt relief program you’re considering.

Nonprofit Credit Counseling Vs. For-Profit Debt Relief

There’s a major difference between nonprofit credit counseling agencies and for-profit debt settlement companies.

Nonprofit credit counseling organizations generally focus on budgeting assistance, financial education and structured repayment plans. Their goal is usually to help you repay your debt rather than settle it.

For-profit debt settlement companies tend to focus on negotiating reduced balances. While debt settlement can help in severe cases, it can be costly and cause significant damage to credit scores.

Signs You Should Consider Debt Relief

It’s important to recognize these signs that you need help tackling your debt:

How To Find The Right Debt Relief Program

To find the right debt relief program, start by assessing your various debts and seeing how much you owe. Then ask yourself:

Before pursuing any of the debt relief options above:

Bottom Line: Explore A Range Of Debt Relief Options

Debt relief can provide meaningful help for people struggling with debt, but there’s no one universal solution. The best approach depends on the reason you have accumulated debt and your current financial situation.

It’s generally best to explore lower-risk debt-relief options before jumping into debt settlement or bankruptcy. And it’s important to understand the potential impact of your debt relief option on your finances and credit score prior to moving forward.

Ready to explore your options? Compare personal loan rates to see if debt consolidation could work for you.

Maurie Backman

Maurie Backman has more than a decade of experience covering personal finance topics that include mortgages, loans, retirement, Social Security, and investing. Prior to becoming a full-time writer, she worked in the financial industry as well as in product design and marketing. Maurie holds a bachelor's degree from Binghamton University, where she studied creative writing and finance. She was happy to combine her two areas of study into a career that allows her to educate consumers on a host of financial topics.

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