A Comprehensive Guide To Debt Relief Programs

While it’s commonly regarded as negative, debt isn’t inherently bad. A mortgage or auto loan can help you to secure housing or transportation. In addition, responsible use of credit cards can help you build positive credit and reward you for everyday purchases.

Debt becomes a problem when you don’t have the means to pay it off or owe too much to too many companies to pay down the balances. Help is available through many debt relief options. Determining how each option might fit your financial situation can help you make the best decision.

Types of debt relief

Debt relief is an umbrella term for multiple programs that can help lower or eliminate your debt. These programs can help you:

• Decrease what you owe.
• Reduce or eliminate the debt’s interest rate.
• Write off part or all of your debt.

Debt consolidation loans

Debt consolidation loans involve money you borrow from a bank, credit union or other lending institution to pay some, if not all, of what you owe to creditors and creditors. Multiple debts are consolidated into one loan, which you pay back over time, providing debt relief from assorted balances, payments and interest rates.

Many people gravitate toward consolidation because it simplifies their budgets and can result in smaller monthly payments. The extra money can be invested elsewhere, like into savings or retirement accounts.

Pros of debt consolidation

• Consolidation can assist with budgeting efforts.
• It can provide a lower interest rate than credit cards.
• Depending on the loan’s term, you may pay down debt faster.

Cons of debt consolidation

• Loans typically require a good to excellent credit score of 670 or higher.
• The loan application could temporarily lower your credit score by a few points.
• Upfront fees and costs can make borrowing costlier than the original debt payments.

When to use: If you have a good-to-excellent credit score and the costs and interest rates are less than your current payments.

Debt forgiveness programs

With a debt forgiveness program, a creditor eliminates part or all of your debt based on factors like financial distress. Debt forgiveness is typically used for non-revolving debt, like student loans, mortgages, medical debt or even taxes. 

Although forgiveness programs can offer debt relief, they are not typically a fast and easy approach. Payment structuring can take time to organize and months or years to pay off. 

Pros of debt forgiveness programs

• All or part of your loan could be wiped out.
• Debt forgiveness can help you avoid drastic measures like bankruptcy.
• Depending on the plan, you can pay down debt more quickly.

Cons of debt forgiveness programs

• Participation could hurt your credit score.
• Some debt forgiveness methods can be complex and time-consuming, with no guaranteed outcomes.
• The IRS considers forgiven amounts as taxable income.

When to use: If you’re interested in paying down overwhelming non-revolving credit loans and want to avoid bankruptcy.

Balance transfer credit cards

A balance transfer credit card allows you to move existing debts from other credit cards to a single account. Balance transfer credit cards frequently offer a 0 percent introductory annual percentage rate (APR) on the balances that you transfer to the new line of credit, then give you a period to pay off that amount without incurring interest charges.

The introductory rate must stay in effect for at least six months unless you’re more than 60 days late on a payment. Some introductory rates can last up to 18 months or longer. While a balance transfer may offer some breathing room during your promotional interest period, it is not a long-term debt relief strategy unless you can pay the balance in full. Minimum payments must also still be made during your introductory rate.

Pros of balance transfer cards

• It can help pay down debt more quickly.
• It reduces multiple credit card payments to one monthly payment.
• No interest rate accrues during the introductory period.

Cons of balance transfer cards

• A balance transfer fee of 3 percent to 5 percent of the amount transferred could add extra expense.
• Failure to pay the entire amount may result in costly interest rate hikes once your promotional period ends.
• You need a good to excellent credit score of 670 or higher to qualify.

When to use: If you can pay off the card’s entire balance in time and the transfer fees don’t add more financial stress to your situation.

Debt management program

Through a debt management program (DMP), you work with a credit counselor on a roadmap to help you get out of debt sooner. The plan includes budget development to help you better manage your finances. The credit counselor can also work with creditors to negotiate concessions like fee waivers or reduced interest rates.

If creditors agree to the plan, you make the one monthly payment specified to the credit counseling agency, which then divides that amount between each creditor participating in the plan. While credit counseling agencies are nonprofit, a fee could be attached to each monthly payment you make.

Pros of debt management programs

• You obtain a personalized roadmap to help better manage your finances.
• The company you work with can help negotiate concessions from creditors, like lower interest rates.
• You make only one payment a month, which helps with budgeting and may improve your cash flow.

Cons of debt management programs

• Some debts aren’t eligible, like student loans or secured debts such as mortgages, and not all creditors will participate.
• You must close all open credit accounts and won’t be allowed to apply for new credit during the process.
• You must make consistent payments to continue participation.

When to use: If you can pay off the card’s entire balance in time and the transfer fees don’t add more financial stress to your situation.

Debt settlement programs

Through a debt management program (DMP), you work with a credit counselor on a roadmap to help you get out of debt sooner. The plan includes budget development to help you better manage your finances while pursuing debt relief and beyond. The credit counselor can also work with creditors to negotiate concessions, such as fee waivers or reduced interest rates.

If creditors agree to the plan, you make the one monthly payment specified to the credit counseling agency, which then divides that amount between each creditor participating in the plan. While credit counseling agencies are nonprofit, a fee could apply for each monthly payment you make.

Pros of debt settlement

• It can help you settle your debt for less than you owe.
• This could be a way to avoid bankruptcy.
• After agreeing to a settlement, creditors will no longer hassle you with collection calls.

Cons of debt settlement

• Creditors might not be willing to negotiate.
• It will likely harm your credit score.
• Settlement can take anywhere from several months to several years.
• Written-off debt could be considered taxable.
• Fees are often involved.

When to use: If you have high levels of unsecured debt, struggle to keep up with minimum payments and have tried other debt-relief options. However, this solution shouldn’t be the first or even second one considered.

Bankruptcy

Bankruptcy is a legal option that can provide a path to debt relief. However, this should be considered the tool of last resort when you’ve tried every other way to resolve your credit issues. 

There are two common forms of bankruptcy: Chapter 7, which involves the liquidation of property to pay creditors, and Chapter 13, which creates a court-mandated payment plan to pay creditors.

Pros of bankruptcy

• Creditors can’t hassle you until a repayment plan has been finalized or the bankruptcy is discharged.
• Debts could be settled for less than what was owed, while others might be written off.
• You could get a fresh start and a clean slate on which to rebuild your financial foundation.

Cons of bankruptcy

• Bankruptcy can be expensive due to attorney and court fees.
• Depending on your circumstances, you might have to sell some of your assets, like non-retirement investments, furniture or jewelry.
• The bankruptcy will stay on your credit report for seven to ten years, depending on which type you file.

When to use: Bankruptcy should be used if other debt relief options — except for debt settlement — haven’t worked for you. Use it only if you have a large amount of debt you can’t pay off during your lifetime, have experienced an extreme income loss or are being sued for money you can’t repay.

When should I seek debt relief?

Unfortunately, people can get in over their heads when borrowing money. The New York Federal Reserve reports that household debt in the United States has reached the trillions, a figure that has increased over the last decade. Compounding the problem is an increase in credit card delinquencies among borrowers with maxed-out accounts.

You don’t need to be maxed out on your credit cards to be considering debt relief. Here’s when you might consider using a debt relief program:

• Minimum payments aren’t reducing debt: If you can only make minimum payments, yet your balances are hardly decreasing due to high interest, a debt relief program might help lower interest or restructure payments.
• Your debt-to-income ratio is too high: When a significant portion of your income goes toward debt payments, leaving little for savings or necessary expenses, it can be a sign that debt relief could improve your financial balance.
• Falling behind on payments: If you’re often late on payments or at risk of defaulting, seeking debt relief can help you avoid collections and protect your credit.
• Debt is causing significant stress: When debt impacts your mental health, relationships or quality of life, it might be time to explore relief options to regain peace of mind.

Bottom line

Debt relief programs can be valuable, but each option has unique advantages and trade-offs. Understanding the different programs and how they work is the first step toward regaining control of your finances. 

Consulting with a reputable credit counselor or financial advisor can help you evaluate your choices and decide on a plan that aligns with your needs and offers the best path forward. With informed decisions, guidance and a proactive approach, debt relief can be a powerful tool to help you progress toward financial stability and a debt-free future.