Debt Relief: Do you know your options?

Debt Relief
Aly J. YaleMay 4, 2022
Key Takeaways:
  • Debt relief is a broad term that includes several strategies you can use to reduce and eventually eliminate debt more effectively.
  • The most common types of debt relief for people in financial hardship are credit counseling, debt settlement, and bankruptcy.
  • If you are in financial hardship, seek professional help.

Credit cards, student loans, and other debts can often be overwhelming. You fall behind on payments once or twice, the late fees add up, and paying those debts off gets more expensive — not to mention further out of reach. If you’re feeling this way, debt relief may be an option. 

Here’s what you need to know about debt relief and how it might get your finances back on track.

What is debt relief?

Debt relief is a broad term that encompasses several strategies use to pay off, reduce, and eventually eliminate debt more effectively.

There are many types of debt relief, including debt settlement, debt consolidation, and debt refinancing. The right strategy largely depends on the types of debts you’re dealing with, how many debts you have, and your unique financial situation, among other factors.

Typically, you’d seek debt relief from a professional debt relief company or designated credit counseling agency. In some cases, you may be able to use various debt relief strategies on your own — without the help of an agency or professional. However, this depends on your availability, negotiating skills, and the severity of your debt problems.

How does debt relief work?

Debt relief can work in many ways. Some services may simply give you a path to pay off your debt within a certain timeframe (as in a debt management plan), while others may reduce your interest rate, payment, or total balance to make them more manageable. Still, others might consolidate your debts or eliminate them altogether.

Here are just a few ways debt relief may be able to help:

  • Reducing your interest rate or payment
  • Consolidating your debts and streamlining repayment
  • Refinancing your debts to get more favorable terms
  • Changing your loan or repayment terms
  • Reducing your balance 

Debt relief can also include more drastic measures, like filing for bankruptcy. While this can eliminate many of your debts, it’s a strategy you’ll want to consider very carefully before pursuing, as bankruptcy comes with many long-term consequences. 

Types of debt relief

There are many types of debt relief, each with its own unique advantages. Let’s take a look at some of the more common debt relief services you can choose from:

Debt management plans

Debt management plans, or DMPs, are programs offered by credit counseling agencies and debt relief companies. They're essentially a defined path toward paying off your debts (in full) over a certain period.

Here's how they typically work: The agency will negotiate a lower interest rate or payment with your credit card issuers. You’ll then pay the agency a set fee each month, which they will use to pay each of your creditors on your behalf. This approach streamlines repayment (you only have one payment per month) and can often help you pay off your debts faster and for less than you otherwise could have.

Debt settlement

Another option for tackling your debt is called settlement. Put simply: Debt settlement is when your creditor agrees to reduce your balance in exchange for you paying it off immediately. While you can certainly negotiate with your creditors directly in hopes of settling your debts for less, many consumers enlist a debt settlement company instead.

A debt settlement company will have you set up a debt settlement savings account, which you’ll contribute to monthly rather than paying your creditors. Once you’ve reached a savings balance the debt settlement professional feels is an appropriate amount to offer your creditors, they will reach out on your behalf to negotiate a settlement. On average, the process takes anywhere from four to six months. 

Keep in mind that debt settlement companies do receive a fee if they can settle one of your debts successfully. They’ll usually take a percentage of your total savings, though the exact amount varies by company.

Debt consolidation

Debt consolidation is the process of rolling all your disparate debts into a single one. Here's how that works: You'll take out a debt consolidation loan (typically a personal loan) and then use that loan to pay off all your credit cards, loans, and other debts. 

From there, you only need to make payments on your consolidation loan rather than all the other debts you were paying down before. This strategy streamlines the repayment process. If you're able to secure a longer term or lower interest rate, it could reduce your payment and long-run interest costs too.

Debt refinancing

Debt refinancing is a strategy for replacing your debts with new ones, ideally with more favorable terms or a lower interest rate. For example, if you were having trouble making your car loan payments, you might refinance into a new loan with a longer term (say five years versus the three you currently have). This strategy would let you spread your balance out over a longer timeframe, thus reducing your payment.

Credit counseling

Credit counselors provide a wealth of services to help get your finances back on track. They can educate you on various financial and debt management topics, help you develop a budget, advise you on improving your credit score, and arrange a debt management plan that's customized to your exact situation. 

Often, credit counseling is free of charge too. To find a certified financial counselor in your area, start with the National Foundation for Credit Counseling's online locator tool

Bankruptcy

In extreme cases, bankruptcy might also be a debt relief solution. Depending on what types of debt you have, it may even wipe your balances entirely clean.

You shouldn’t file for bankruptcy lightly, though. A bankruptcy will stay on your credit report for at least seven years (sometimes 10), which could make it hard to take out a loan, get approved for a rental, or even get a job in some industries. Consider these consequences carefully, exhaust all other options, and speak to a financial advisor before opting for such an extreme measure.

When should you consider debt relief?

Debt relief isn’t the right choice for everyone. If you’re still actively adding to your debt (charging purchases to credit cards, for example), debt relief won’t be a good fit. For one, it indicates a deeper spending problem. Until you’ve addressed this, it’s not likely any debt relief services will succeed in the long haul.

Additionally, most debt relief companies and credit counselors require you to stop using your credit cards, lines of credit, and loans before you can enroll in their programs. This keeps the problem from compounding while you work to pay off your debts.

On the other hand, if you've stopped racking up debt but are still unable to manage your payments, debt relief may be a smart move. If you've fallen behind on bills or have started to consider bankruptcy, it also may be a wise path to explore before taking more drastic measures.

Avoiding debt relief scams

Scams are sadly common in the debt relief world, so it's important to be diligent when seeking help for your debt problems. 

Here’s what the FTC has to say on the matter: “Debt relief service scams target consumers with significant credit card debt by falsely promising to negotiate with their creditors to settle or otherwise reduce consumers' repayment obligations. These operations often charge cash-strapped consumers a large up-front fee, but then fail to help them settle or lower their debts – if they provide any service at all. Some debt relief scams even tout their services using automated "robocalls" to consumers on the Do-Not-Call List.”

Some common signs of a debt relief scam include: 

  • Charging upfront fees 
  • Cold calls or unsolicited marketing tactics 
  • Lofty claims (like being able to reduce your debt by 50% or more)

If you suspect you may be a victim of a debt relief scam, report it to the Federal Trade Commission, the Consumer Financial Protection Bureau, or your state attorney general’s office.

31 Comments

TTripp Harrington, Apr, 2014
Debt relief can be a challenging process and avoiding shysters is a top priority. Way too many people make the mistake of refinancing their home mortgage in order to payoff other debts. While this may not always be a mistake, the real objective should be to eliminate debt and not take on more debt with that many more years of interest payments. Wouldn't it be nice if you could have a financial GPS system that could tell you exactly what steps to take in order to become totally debt free in the minimum possible time?
JJillian Stevens, Mar, 2014
Hello, I don't quite know how to ask this. I have a $7000 loan personal loan from a bank, I got behind and recently received a court summons, I actually got significantly behind on my payments, but was able to catch up after the court summons (naturally). I have been speaking with another bank about Debt Consolidation, in which they will immediately send a check to the original creditor. Is this allowed? I am able to get debt consolidation so long as I have a co-signer, but I feel like I am cheating or something. Does that make sense?
BBill Admin, Mar, 2014
There is nothing improper about paying off your old loan with a new loan. Call your current lender to get an exact payoff amount, so the new loan will pay only what you owe. Make sure that there is no pre-payment penalty for the current loan. I doubt there is, but check to make sure.
NNick R, Apr, 2013
I owe no more than 1800$ and the collection agency is trying to collect $6200. What can I do?
BBill Admin, Apr, 2013
I want to start my answer to your question by quoting the California Office of the Attorney General. What they say applies directly to California consumers, however, the principles outlined are a good starting place for figuring out what you need to do.

The California AG's Web site says, "A collection agency can add interest to your bill, however, the terms and rates depend on the circumstances of your particular account. The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) must be expressly authorized by the agreement creating the debt or as permitted by law. An attorney should be able to tell you how much the agency can legally charge you. You are also entitled to an explanation from the collection agency as to how much they are charging you and why. You should ask them by letter to explain to you in writing."

Therefore, you should:
  1. Review the original agreement you made with the creditor
  2. Contact your state's Office of the Attorney General Consumer Affairs Office
  3. Write the collection agency for an explanation of how they reached the current balance
  4. Consult with an attorney in your state, if you don't receive a satisfactory explanation.
DDale W, Nov, 2012
I have about $60,000 in private student loan debt. All of which has been turned over to various collections agencies. $15,000 in Federal Student Loans, which i just started making normal payments on. Lastly $7,000 in a credit card debt that I received a court summons in CA but I was moving out of state the next day and was not able to take care of it. Should I consider credit counseling or debt settlement? My goal is to buy a home in the next 10 years, and I just want my credit better.
BBill Admin, Nov, 2012

First, you are wise to get yourself current on your federal student loans. Make maintaining a current status on these loans a high priority.

Second, consult with a California lawyer who has consumer law experience immediately. Under California civil procedure rules, because you were present in the state the moment you received the summons, it is likely a California court will consider it has personal jurisdiction over you, regardless of your leaving the state and residing elsewhere the day after your being served. A California lawyer will help you write a answer to the summons and can represent you in court. He or she can also help you negotiate a settlement on this delinquent account.

Third, regarding the $60,000 in delinquent private student loan debt, we are starting to see debt settlement companies accept private student loans under limited circumstances. Consult with a Bills.com debt settlement partner to learn if debt settlement is an option for you. Regarding credit counselling, that is unlikely to be an option for private student loan debt, given that credit counselling debt management plans have a maximum length of 5 years, and repay 100% of the balance due.

Finally, read the Bills.com article Getting a Mortgage Loan with Bad Credit to learn what steps you can take now to qualify for a mortgage in the future.

JJason J, May, 2012
I have about $6,000 in unsecured debt and collections, but dont know how to take care of it, or how to go about and find if i have any other collections that i dont know about. How do i go about finding these and paying them off without going futher into debt.
BBill Admin, May, 2012
Start with a no-cost credit report at annualcreditreport.com. Review your report and see what debts are listed and who is collecting on them. There should be contact information in the back of the report for your creditors.

Consider how long it has been since you paid on your accounts and check to see if any of the debts may have passed the statute of limitations. If the SOL has not passed, you can contact your creditors to try and work out a payment or negotiate a settlement. Be aware that when you contact your creditors and shine light on yourself, it is possible that one or more may move aggressively to collect on the debt.
Frequently Asked Questions
Where should I go for debt relief help?
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It depends on the services you’re looking for. If you simply need budgeting help or would like to get on a debt management plan, you might start with a nonprofit credit counseling agency. If you’re looking to settle, refinance, or consolidate your debts, a debt relief company may be a better solution.

Can debt relief hurt my credit?
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Some debt relief options can hurt your credit. Settling a debt, for example, goes on your credit report and will remain there for seven years. payments can impact your credit and lower your score.

Others, though, may actually help your score — especially if they help you avoid late payments. Payment history accounts for 35% of your score (so late payments are a pretty big deal).

How do I choose the best debt relief company?
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To choose the right debt relief company, you'll want to look at their experience, the ratings and reviews from past clientele, and their memberships in various industry organizations. Membership in the American Fair Credit Council, for example, ensures the company is held to the highest FTC standards.

How much does debt relief cost?
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The cost of debt relief depends on the services you’re seeking. Credit counseling is often free, while debt settlement companies will typically take a portion of the money you save. Debt relief companies may also be paid by credit card companies in some scenarios.