Debt Reduction Program Pros and Cons: How to Find the Right Solution for Your Financial Situation

Debt can be a normal part of life, a way to go to college, buy a house, or realize other big life dreams. But when it becomes more of a burden than it’s worth, you have more power than you might think when it comes to getting rid of it. 

Debt reduction programs could help you speed up your progress toward becoming debt-free by helping you pay off debt faster, or—in many cases—lowering the amount that you have to pay back. You have many options to choose from, and some might work better for you than others. 

We’ll cover what’s available, along with the pros and cons of each debt reduction option. That way, you can get started today on your journey toward a more stress-free financial life.  

What Are Debt Reduction Programs?

Debt reduction programs are organized, formal efforts that help you deal with debt by reducing the amount you owe. This could help save you time and money because it’s easier to pay off a smaller balance than a larger one. 

There are two main types of debt reduction programs. You can negotiate a settlement with your creditors, with or without professional help, to accept less than you owe and forgive the rest. Another option is to declare bankruptcy, where you’ll work with the legal system to potentially reduce the amount that you have to repay.

Neither option is good or bad, in itself. It just depends on your personal situation. Some people are a good fit for debt settlement programs, while for others, declaring bankruptcy might align more with their money goals.

Debt reduction programs work differently than other debt strategies, like DIY debt payoff or debt management plans, where you repay all of the debt you owe. Those can be good options if you can afford to pay off your debt entirely. But that’s not always a possibility, and if that’s the case, a debt reduction program might provide the welcome relief you’re looking for. 

Debt Settlement Programs: Negotiate for Less

The basic idea behind debt settlement is simple: you try to negotiate with your creditors to accept a smaller amount than you actually owe in exchange for being released from the debt. It’s a deal that benefits both of you.

It helps to think of what each of you could get out of the deal. You can’t afford the debt, and so you’re able to pave a way forward to move on with your life. Your creditor doesn’t want to experience a total loss on what you owe, or worse, incur additional costs trying to collect. They may be willing to take what they can get—even if that’s less than the full amount you owe. 

A few things could help you here. If you’re able to save up a settlement offer—i.e., a significant lump sum of money that you offer as a one-time payment—your creditor may be more willing to accept the deal. It’s like a bargaining chip. 

Often, people aren’t able to save for a settlement offer and keep up with payments. So, they stop paying their debts, if they haven’t fallen behind already, to save. Stopping payments sends a strong signal to your creditors that you’re in financial distress. However, this is not a decision to be taken lightly. Stopping payments is likely to lead to serious credit score damage and intense collection efforts. Creditors could even sue you.

Many people are successful in negotiating their own debt settlement offers. But creditors don’t offer debt forgiveness freely. Negotiating can take a lot of time, effort, and determination. That’s where a professional debt settlement program could help. Look for companies that are open and transparent about their process and the cost, have a long track record of success, and have many positive customer ratings and reviews. 

Pros

• One affordable monthly deposit into an account that’s just for debt settlement

• Private process

• DIY or professional help available

• Potential to repay less than you owe

• No debt settlement fees if professional help isn’t successful

Cons

• Success isn’t guaranteed

• Possible tax consequences 

• Fees for professional debt settlement help

• Fees for dedicated program account

• Credit score damage from missed payments and settled debt

• Creditors could sue if you stop payments 

Bankruptcy: Legal Protection from Creditors

Bankruptcy is a legal process for debt relief that takes place through special bankruptcy courts. There are two main types, and each works in a very different way. 

In Chapter 7 bankruptcy, you’ll work with the courts to sell off some of the things you own to repay your creditors over the course of a few months. Any eligible debts left over at the end are wiped clean by a bankruptcy judge. You must meet certain income requirements to qualify.

In a Chapter 13 bankruptcy case, you’ll make monthly payments to your creditors for three or five years, and any remaining eligible debts after that are discharged (forgiven) by the bankruptcy judge. This is a longer process, and it’s often harder for people to keep up with the program for that long. 

Not all debts can be discharged in bankruptcy, like your home and auto loans, and most student loan debt. That said, many people are afraid of bankruptcy because they fear losing their home. The truth is that most people don’t lose their homes, although it is possible. The laws are complex and they vary by state, so it’s very important to work with a lawyer, even though that can add to your cost.   

Pros

• Legal protection from creditors

• Temporarily stop collections, including foreclosure

• Could eliminate many debts

• Quick process, for Chapter 7

• Some or all of the things you own may be protected from forced sale

Cons

• Negative social stigma

• Credit damage

• Doesn’t work with all debt types

• Court fees and attorney costs

• Years-long payment plan for Chapter 13

• Success isn’t guaranteed, especially for Chapter 13

• Bankruptcy filings are public records that anyone can look at

Debt Management Plans: Structured Repayment (With No Debt Reduction)

Although they sound similar, a debt management plan works very differently from debt settlement. You can only sign up for a debt management plan through a nonprofit credit counseling agency. They’ll act as a go-between for you and your creditors to waive certain fees and lower your interest rate. You’ll pay the agency one monthly payment, which will then be sent to each of your creditors. 

A typical debt management plan lasts for three to five years. At the end, you’ll have repaid all of your unsecured debts. It doesn’t reduce the amount you owe, aside from any fee waivers your counselor can negotiate, such as for late fees. 

Credit counseling agencies often offer other support options besides debt management plans. So while you can’t include debts like your home mortgage in your plan, they may be able to offer other types of help, like foreclosure prevention assistance or other ways to deal with your debt. We’ll cover some of those next. 

Pros

• One monthly payment

• Negotiate lower rates and fee waivers

• Professional support in a formal program

• Less credit damage than bankruptcy or debt settlement if you follow the plan

• Support in dealing with other debts not in your plan

Cons

• Must close credit accounts

• Initial credit score damage

• Only works for unsecured debt

• Monthly fees and account setup fee

• Typically very high monthly payments 

• Must make monthly payments for several years

DIY Debt Strategies

Many people successfully navigate their own debt relief by using specific strategies like debt consolidation and the debt snowball or debt avalanche methods. 

Debt consolidation is getting a new loan and using it to pay off multiple smaller debts. The idea is to transfer your high-interest debt to a less-expensive debt. For example, you might open a balance transfer credit card offering 0% APR for 18 months and transfer over your existing credit card balances. Or you might open a debt consolidation personal loan that charges a lower rate than your credit cards. You could make quicker progress in paying down debt at a lower (or zero) interest rate than you can when most of your payment is going toward interest. 

The debt avalanche and snowball methods are two techniques for paying down your debt without taking on any new debt. You’ll need enough income to make extra payments toward one debt at a time. The debt snowball method has you pay off your lowest-balance debt first, while the debt avalanche method has you pay off your highest-rate debt first. 

In both cases, you pay the minimum on all other debts. When you pay off one debt, you roll that payment into the payment you were making on your next target debt, until you’re making large payments and quick progress in paying off your last debt. 

Pros

• Works with most types of debt

• Customizable strategies and options

• More control over your payoff journey

Cons

• No professional support

• Requires financial discipline

• Progress could be slower and easier to derail

• No debt reduction

Your Financial Hardship and Your Options

If you’re having a hard time managing your debt, relief is available. A key part is finding the right type of relief for your particular financial hardship. 

Just as you wouldn’t hire a whole construction company to change a lightbulb in your house, you wouldn’t necessarily jump to the most extreme types of debt relief. But if you need to rebuild your entire home—or your finances—then big solutions may provide the best support. 

So, how do you know? A good way to judge the best approach is to look at the type of financial hardship you have and how it affects your ability to pay back your debt. 

If you still have good earning power and can reasonably expect to pay back most of your debts within a few years, aside from long-term debts like mortgages and student loans, then DIY debt strategies might be all you need. If you can cut back on your expenses or even increase your income, then you could make even quicker progress yet. 

If you’ve suffered some setbacks to your income and can’t be expected to repay your debts in a timely manner the way you were before, then seeking out other strategies like bankruptcy or debt settlement might be right for you. Setbacks can include things like:

• Job loss

• Disability or injury

• Death of a partner

• Divorce

• Illness and high medical bills

• New obligations, like becoming a caregiver for a family member

Making the Right Choice for Your Situation

No matter how much debt and income you have, being in debt can be a struggle. Luckily, you have a lot of options for how to gain the upper hand over your debt. Along with the type of financial hardship you have, also consider a few other factors. 

How much will you need to use your credit over the next few years? Some options, like bankruptcy and debt settlement, can harm your credit score more than others, like DIY debt payoff. If you want to buy a house soon and could manage paying off a debt consolidation loan, for example, then bankruptcy might not be such a good idea.

How much debt do you have, and what are your other financial obligations? If your debt is outsized compared to your income, and your basic needs take up much of your cash each month, then perhaps a debt settlement program could help you put those debts behind you for good.

It’s worth taking a close look at all your options before deciding. You can find calculators online to find your debt consolidation loan options or debt snowball payment plans. Credit counseling agencies generally offer free debt evaluations, and debt settlement companies like Freedom Debt Relief also offer free consultations to discuss your options and eligibility, too.