Debt Relief (2024)

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Banking Expert, Editor

Debt relief refers to a variety of strategies for making debt easier to handle. What debt relief looks like for you may hinge on the types of debts you have and what you need help with most.

For example, you may need credit card debt relief if you’re struggling to pay off credit card bills. Or you may be interested in debt consolidation if you have several types of debt to pay off.

Credit counseling, debt management plans and debt settlement also fall under the debt relief umbrella. While the means are different, the end goal is similar. Debt relief is about helping people find a workable path for eliminating debt.

Debt relief works by making it easier for you to reduce your debt burden. The first step is realizing that you need help with managing debts. The next step is choosing a debt relief option.

Some of the ways debt relief can work include:

• Interest rate reductions
• Changes to credit card or loan repayment terms
• Reducing the principal amount owed
• Consolidating debt
• Loan refinancing

Bankruptcy can also be considered a form of debt relief. But there can be significant credit score impacts associated with filing bankruptcy.

When comparing debt relief programs or options, it’s important to consider both the good and the bad.

Debt relief isn’t a one-size-fits-all solution. There are different ways you can approach it, depending on how much you owe and what type of interest rates you’re paying.

Here’s a closer look at four of the most common debt relief options.

1. Debt Consolidation for Credit Card Debt Relief

You may choose to consolidate debt if you have several different loans or lines of credit to repay.In simple terms, debt consolidation means combining multiple debts into one. For instance, you may use a personal loan to consolidate debt from multiple credit cards.

Balance transfers are another option for credit card debt relief. In this case, you’d open a new credit card account, ideally at a low or 0% annual percentage rate, then transfer your existing balances to this card.

Consolidating debt means you’ll have just one payment to make each month. It may or may not save money on interest, however. It’s also important to understand the pros and cons of debt consolidation.

2. Credit Counseling

Credit counseling involves meeting with a credit counselor to discuss your budget, debt and finances. A credit counselor can review your spending and debts, then help you create a personalized plan for managing both.

Seeking out a credit counselor could be a good fit if you just need some help with creating a workable debt repayment plan. A credit counselor also may help educate you on basic budgeting issues that could have led to your having excess debt in the first place.

Many nonprofit credit counseling agencies offer their services free of charge.

It’s a good idea to check the agency’s accreditation status—and the credit counselor’s certification status—with the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA).

3. Debt Management Plans

If you’re working with a credit counselor or a debt management company, one possibility they may suggest is a debt management plan. A debt management plan, or DMP, works like this:

• You choose which debts to enroll in the program.
• You make one single payment to the debt management plan each month.
• That payment is distributed among your creditors, according to the terms of the plan.

Debt management plans are similar to debt consolidation, in that you only have one payment to make. But this type of debt relief program doesn’t require you to take out a loan or open a balance transfer credit card. And, depending on the program, you may be able to get your interest rate lowered or have certain fees waived.

Under the terms of a debt management plan, while you may receive more favorable interest rates or relief from fees, you still repay the entire principal amount owed.

4. Debt Settlement

Debt settlement is considered an option of last resort. It allows you to pay off debts for less than what’s owed. If your creditor agrees to a debt settlement, any remaining balance is canceled.

This is effectively a type of debt forgiveness, since you don’t have to repay anything more than the agreed-upon settlement amount. Debt settlement is something you can do yourself if you have cash to pay your creditors and you’re comfortable negotiating with them one on one.

There are also debt relief companies that will negotiate for you. This, however, typically involves paying a fee to the company that’s helping you to get loan relief or credit card debt relief.

Also, keep in mind that you typically need to be past due before a creditor will consider settling a debt. So, compared to other debt relief options, debt settlement can be more damaging to your credit score.

For example, if you work with a debt settlement company, they will ask you to make payments to a separate account they set up, rather than paying your individual creditors. This will cause you to be past due with your creditors for a period of time, which negatively affects your credit.

There also can be income tax implications to debt settlement—whether done through a debt settlement company or on your own—because the amount of debt that’s forgiven likely will be considered taxable income.

Debt relief may not be right for everyone. So, before digging into the options, it’s helpful to understand who debt relief is suitable for.

You may consider debt relief if:

• You’re behind on credit card bills or other loan payments.
• You’re not behind on bills yet, but you’re struggling to afford your payments.
• You’ve tried to manage your debt on your own, but you can’t seem to make any progress.
• You’ve contemplated filing bankruptcy.

Debt relief may not work for you if:

• You’re continuing to add to your debt balances.
• You’re not interested in making a long-term commitment to repaying debt.

If you’re still creating new debt, then debt relief alone may not be enough. You may also need to address the spending habits that are keeping you in debt.

Emergency debt relief programs can help you get out from under your debt burden. But it’s a decision that needs to be made carefully. It isn’t necessarily a perfect solution and there may be some serious trade-offs to make.

Before getting started with debt relief, here are three important things to consider.

1. Interest

Debt consolidation loans or lines of credit and 0% balance transfer offers can provide credit card debt relief. But consider the cost involved.

Ideally, consolidating debt results in a lower interest rate. A lower APR means more of your monthly payment goes toward the principal so you can repay your debt faster. You also accrue less interest over your repayment period.

If you’re interested in how to consolidate debt, first consider the rates you may qualify for based on your credit score. And, if you’re interested in something like a debt management plan, ask whether a rate reduction is a possibility when working out repayment terms.

2. Fees

There may be fees associated with some debt relief options and it’s helpful to factor those in when deciding whether the cost is worth it.

For instance, credit counselors may or may not charge a fee to help you create a budget and spending plan. With debt consolidation loans, there are loan origination fees and prepayment penalties to watch out for. If you’re using a 0% APR balance transfer credit card to consolidate debt, then you may pay a balance transfer fee.

If you’re interested in a debt management plan, there may be a monthly fee required to enroll. And companies that negotiate debt settlement also can charge a fee for their services, sometimes as much as 15% to 25% of the amount settled or forgiven.

Since fees can add to the total amount you have to repay, it’s important to know what you’re paying up front and how it can add up over the long term.

3. Scams

When you’re interested in debt relief services, whether it’s credit counseling, a debt management plan or debt forgiveness, it’s important to ensure that the company you’re working with is legitimate. Otherwise, you run the risk of falling victim to a debt relief scam.

You also want to understand the differences, as outlined above, among debt consolidation, debt management plans and debt settlement. Not all debt relief providers use these terms clearly enough for you to understand what you’re getting into unless you read or listen very carefully.

As you compare debt relief companies, be aware of the following red flags:

• Demands for fees that must be paid before services can be offered
• Lack of transparency in explaining what the company does or provides
• Requests for access to personal or banking information
• Promises or guarantees that seem too good to be true

The Consumer Financial Protection Bureau (CFPB) maintains a database of consumer complaints regarding debt relief companies and other financial services providers. You can check the database, along with the Better Business Bureau, to verify a company’s reputation.

Debt relief has the potential to affect your credit reports and credit scores, although the actual impact depends on which option you choose and where your credit score was to start.

With debt settlement, you may need to be several months’ behind on payments in order to negotiate a payoff agreement. Most of the damage to your credit may already have been done, as late payments can be detrimental to your score.

A debt management plan may have a minimal impact on your credit if your creditors continue to report the account as paid as agreed. Credit counseling may have no impact on your credit at all. It could even help to raise your credit score if you’re able to reduce debts and make payments on time after working out a repayment plan.

Before opting in to any type of loan or credit card relief plan, read the fine print first to check for any mention of credit score impacts. It’s also helpful to monitor your credit reports and scores regularly to detect any changes to either one.

If you’re weighed down by debt, then debt relief could help you find the light at the end of the tunnel. It can also help head off the possibility of having to file bankruptcy. Understanding what you hope to get from debt relief and how it can help is critical for choosing the right solution.

How does debt consolidation work?

Consolidating debt means combining multiple debts into one. Two common ways you can consolidate debt are by taking out a personal loan or using a balance transfer credit card. While you will still repay the full principal, you may be able to pay less interest.

How do you cancel debt relief?