What are Credit Card Debt Relief Programs?

Taking charge of your credit card debt is a powerful step toward your financial freedom—and there’s lots of options out there so you don’t have to do it alone. The right debt relief program could help you breathe easier and get started on a new financial path. 

A credit card debt relief program could be one way to deal with excessive credit card debt that you're struggling to repay.

Credit Card Debt Relief Programs Explained

Many different services can fall under the umbrella of credit card debt relief. This includes consolidation, debt settlement, creditor hardship negotiation, debt management plans, and credit counseling.

Debt relief is most commonly used as a synonym for debt settlement. This is when you negotiate with your creditors to get rid of your debt for less than you owe. 

The rest of your debt is forgiven by the creditor. That's why debt relief is sometimes known as debt forgiveness.

How to qualify for a credit card debt relief program

The qualifications for a debt relief program vary depending on the company and program. Most debt relief programs require you to be facing demonstrable financial hardship. This could include:

• Injury or medical emergencies

• Death of immediate family member

• Unexpected expenses

• Divorce or separation

• Reduced work hours

• Natural disaster

• Job loss

Additionally, some debt relief programs will require you to have a certain amount of debt. For example, the Freedom Debt Relief is best for someone who has at least $7,500 in unsecured debt.

Once you meet the basic requirements, a good debt relief program will work with you to find a plan that suits you. Freedom Debt Relief uses a personalized approach to tailor your debt settlement program to your needs.

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Is There Really a Government Credit Card Debt Relief Program?

No. There are no government credit card debt relief programs. 

The confusion is natural, as there are a small handful of government-sponsored debt relief programs for things like IRS debt and student loans. But the government doesn't sponsor any credit card debt relief programs or companies.

If someone claims they can help you access a government credit card debt relief program, it's likely a scam. Run!

The government and credit card debt

The closest thing to a government credit card debt relief program is filing for bankruptcy. Completing Chapter 7 bankruptcy could eliminate some or all of your eligible unsecured debt, including credit card debt. Eligibility for Chapter 7 is strict, however, so it's not a solution for everyone.

If you don't qualify for Chapter 7 bankruptcy, consider debt relief programs from other sources. A legitimate debt settlement company could help you get rid of your debt for less than you owe. You can also consider a debt management plan, debt consolidation loan, or DIY debt payoff.

How Does a Credit Card Debt Relief Program Work?

The exact process depends on what type of credit card debt relief program you use. Let's take a look at the major types of relief programs and how each one works.

Credit card debt settlement

In debt settlement, you negotiate with your creditors to accept less than you owe and forgive the rest. Anyone can negotiate their own debt. You could also hire a professional debt settlement company to negotiate for you. 

Here's a basic rundown of how debt settlement works.

1. Decide on a course of action

The first step is to evaluate your situation and needs to figure out if debt settlement is the best option. List your income, assets, debts, and expenses. If you owe much more than you can afford to repay, debt settlement could be the right call.

You then need to decide whether to attempt it yourself or to hire a professional. You could DIY debt settlement if you're tenacious and organized. 

Or you could leave it to the pros and work with a reputable debt settlement company that specializes in debt settlement and has extensive experience. They may also have relationships with the creditors that could facilitate negotiation. 

2. Find a reputable debt settlement company

If you decide to use a professional, you'll want to search for a reputable company. Check online reviews and research the company's background and fees.

Once you've chosen a company, you'll need to contact them to find out if you're eligible. Freedom Debt Relief requires that you're facing financial hardship and have at least $7,500 in unsecured debt.

3. Save up a settlement fund

After enrollment in a debt settlement program, you'll need to build up a debt settlement fund so you have money to offer your creditors. To do this, many people choose to stop paying their debts. You'll then make monthly deposits into a dedicated account until you have enough to use for negotiation. You own and control the account.

Your debt settlement company will set up the account for you at a bank or credit union. That financial institution might charge a modest setup fee or monthly maintenance fees. Those fees aren’t charged or shared by your debt settlement company. 

Stopping payments to creditors frees up money in the budget to save for settlement. It also shows your creditors that you're struggling to repay the debt, which could make them more likely to negotiate. There’s a downside. If you stop making payments, expect credit score damage and possible collection calls.

4. Negotiate with your creditors

When you have saved enough, you or a debt settlement professional negotiates an amount with your creditors to settle the account. This can involve a bit of back and forth as both parties try to get the best deal possible. Most debt settlement customers get results within the first six months.

5. Agree to a settlement and make payments

Once you and the creditor approve a settlement offer, it's time for payments. If you used a debt settlement company, your creditor will be paid from your settlement account. This could be a single lump-sum payment or a plan that requires multiple payments over time.

When your debt is settled (or the first payment in the payment plan is made), the debt settlement company will take its fee. 

Note that the law prevents debt settlement companies from charging you a settlement fee in advance. Avoid companies that try to charge settlement fees before an agreement has been reached with a creditor and you've approved it.

6. Potentially pay your taxes on forgiven debt

Debt that has been forgiven through debt settlement is considered taxable income by the IRS. You'll need to pay regular income tax on the forgiven amount unless you can show the IRS that you are insolvent. Insolvent means your debts (before settling) exceed your assets. It’s a good idea to talk to a tax professional before you settle any debts, so you’ll understand the possible tax consequences.

Debt settlement could let you get rid of your debt for less than you owe, but it has some downsides. Consider all the pros and cons of debt settlement when looking at your debt relief options.

Credit card debt consolidation and refinance

Refinancing your credit card debt means paying off your cards with another form of debt, such as a balance transfer credit card or a personal loan. If you use the new account to pay off multiple credit cards, you're consolidating your credit card debt into one payment.

Beyond simplifying your repayment, refinancing and consolidating your credit card debt could lower your monthly payment when you're able to refinance at a lower interest rate or if you opt for a longer repayment term. A longer repayment term will mean paying more interest over the life of the loan.

You can use three methods to refinance and consolidate your credit card debt:

• Personal loans. Using a personal loan is a great option if you have good credit. Personal loans typically have much lower interest rates than credit cards. Your monthly payment may go up if you were only making minimum credit card payments.

• Home equity loans. A home equity loan or home equity line of credit (HELOC) is an option if you own your home and have equity. Equity is the difference between your home’s market value and the balance left on your mortgage. The interest rates can be very low, but you risk losing your home to foreclosure if you don't repay the loan.

• Credit card balance transfers. Most credit cards allow you to transfer a balance from one card to another for a 3% to 5% fee. This could be useful when you can transfer your balance to a card with a much lower APR—often, 0%. If you have good to excellent credit, you may qualify for a card with an intro offer that gives you 0% APR on transferred balances for a year or more. You'll start paying the card’s regular APR on any balance you carry after the intro deal expires.

Which method you choose will depend on how much debt you have, your credit scores, and your current interest rates. Consolidation works best for people with good credit who are still current on their payments.

Debt management plans (DMPs)

If you can afford your debt payments but aren't sure how to manage them, you may be eligible for a debt management plan (DMP). This is a structured repayment program offered by credit counseling agencies.

Here's how DMP usually works:

• Typically, you'll meet with a credit counselor over the phone or in person for an initial consultation. From there, you'll create a plan and likely schedule additional check-in meetings along the way. 

• When you enroll your credit card debt into a DMP, a credit counselor contacts your credit card companies and may negotiate lower interest rates or penalty waivers. 

• Then, you'll make a monthly payment to the credit counseling agency to cover the payments on your debts plus a modest plan management fee (usually $25 to $40). 

• Your payment is distributed from your account to your creditors.

• With consistent payments, you could complete the DMP in three to five years. The success of your DMP depends on your ability to keep up with your plan's payment each month.

A DMP requires you to repay all your enrolled debt. There is no debt forgiveness. You’ll also likely have to close your credit cards. Besides the inconvenience, closing credit card accounts while they still have balances is likely to have a negative impact on your credit score.

Can You DIY Your Credit Card Debt Relief?

Yes, you can use most of the above methods on your own. You could create your own debt repayment plan, seek out a way to consolidate and refinance, and negotiate with your creditors on your own. 

For the best DIY credit card debt relief success, bone up on your situation and the various options. Check your credit scores, organize your debts, and find reliable online financial education resources.

To copy what a professional might do, you’ll want to call your creditors and try to negotiate or settle your debts directly. You could also ask about setting up a payment plan or getting a discount for paying upfront or all in cash. Sometimes, you may be able to claim hardship and have your debts reduced as a result.

Getting debt forgiveness is no easy feat—and it could be a hassle. You may need to spend a lot of time on the phone and waiting on hold, particularly if you have debts with multiple creditors.

Do Credit Card Debt Relief Programs Hurt Your Credit?

Not directly, but yes, your credit score will likely drop after enrolling in a debt relief program. Joining a debt relief program doesn't automatically hurt your credit, but the actions you take while you’re in the program could have a negative impact on your credit scores.

How much credit damage will depend on your current credit situation. If you're already behind on payments, you may not have significantly more damage from debt relief.

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide or offer services or advice to repair, modify, or improve your credit.

How debt settlement impacts your credit

Simply being in a debt settlement program doesn't hurt your credit. However, many people who enter a debt settlement program choose to stop making debt payments so they can save up for a settlement offer. 

Stopping payments also shows your creditors you’re facing financial challenges. This could make them more willing to negotiate a settlement.

No matter the reason you stop making payments, missed payments could do a lot of credit damage. Payment history is the most important factor in credit scores, so late or defaulted accounts have a lot of impact. These types of negative items typically stay on your credit reports for seven years.

How DMPs impact your credit

Enrolling in a DMP won't immediately hurt your credit score. As part of the program, though, you'll likely need to close your credit card accounts. Closing credit cards before they’re paid off typically hurts credit scores.

The main way a closed card hurts your credit is through your utilization. Credit utilization is how much of your available credit you're using. You find it by dividing your card balances by your total available credit.

High utilization is bad for your credit scores. Closing accounts reduces your available credit to zero. Any balance makes the account look like a maxed-out card, which is not good. This damage can be reversed by paying down your debts to lower your utilization rate.

How consolidation impacts your credit

The main source of trouble with consolidation is that consolidating debt means taking on a new account. This can have a couple of credit consequences:

• A hard inquiry. Applying for credit results in a hard inquiry or hard credit pull. This can cause minor damage to your credit scores and stays on your credit reports for two years.

• A lower account age. One factor in your credit score is the average age of your accounts. Older is better when it comes to credit. Each new account reduces your average account age, which can ding your credit score until your average goes back up.

How to Choose a Credit Card Debt Relief Program (and Avoid Scams)

Recognizing it's time for action is the first step. Next, it's time to choose how to move forward. You have a wide variety of options for credit card debt relief programs.

Once you've taken a look at your finances, decide how to tackle them. If you think you can make your payments with some help, consolidation or a DMP may be right. If you know you can't afford your payments, debt settlement could be a better fit.

Once you make that decision, it's time to find a debt relief company. You can search nonprofit credit counseling agencies through the National Foundation for Credit Counseling (NFCC). For debt relief companies, you'll need to do a bit of legwork.

How to pick a debt settlement company

When you’re looking at debt settlement options, it could help to make a list of your options. Then, consider each company’s fees, experience, customer reviews, and full scope of services. 

Also check for membership in professional organizations, like the Financial Counseling Association of America or the American Association for Debt Resolution. The Better Business Bureau and your state’s attorney general office are also good resources if you want to check for worrisome complaints or potentially fraudulent behavior before working with a company. 

Contact the company so you can ask questions directly. Some questions you might want to ask include:

• What are your fees and when do I need to pay them?

• What types of services do you offer?

• What kind of debts can you help me settle?

• How long will it take to settle my debts?

• What happens if I miss a payment?

• What support do you offer while I'm in the program?

How to spot a debt relief scam

Scams are common in the debt relief industry, so you need to keep an eye out for red flags. Steer clear of any debt relief companies that make you uncomfortable, aren't transparent, or use aggressive sales tactics. 

Other red flags to watch out for:

• Hidden/surprise fees. All costs should be clearly laid out at the start.

• Upfront settlement fees. Debt settlement companies legally can't charge you a settlement fee until you've approved an agreement and your creditors have received a payment.

• Claims about government credit card debt relief programs. No such programs exist.

• Guarantees about how much debt they can eliminate. No company can know how your creditors will respond until negotiations are started. 

• Claims they can stop all collections efforts. Enrolling in a debt relief program probably won't stop creditors and collectors from contacting you. It also won't stop potential lawsuits regarding your debt. Only bankruptcy can legally stop collection calls and legal proceedings.

• Companies that tell you to ignore your creditors. Legitimate debt relief companies should explain the legal implications of not communicating with your creditors.

Is It Worth Doing a Debt Relief Program?

Any strategy that helps you manage your debt could be worthwhile. Whether a debt relief program is the right solution depends on your specific situation.

If you're current on your payments and have good credit, consolidation and refinancing could help you get your debt under control. If you can afford your payments and just need help with a repayment plan, a DMP from a credit counseling agency could offer that guidance. Both have pros and cons, including fees, so weigh your options carefully.

Debt settlement also has important costs and considerations. It could still be worth pursuing if you:

• Are facing financial hardship like job loss or medical issues

• Are struggling to make all of your minimum payments

• Have more than $7,500 in credit card debt

• Have multiple credit cards with high balances

• Have fallen behind on your payments

• Are receiving collection calls or letters

• Want to get rid of your debt for less than you owe

Debt relief programs aren't the best fit for everyone. If you don't have significant credit card debt and can afford your monthly payments, you may not need debt relief to get back on track. Consider a DIY debt management approach like the debt snowball or debt avalanche methods.

Alternatives to Credit Card Debt Relief Programs

Another option for dealing with credit card debt may be bankruptcy. Most consumers will file Chapter 7 or Chapter 13 bankruptcy. Chapter 7 is generally preferred since it’s the one that lets you walk away from eligible debts, but it has strict eligibility requirements.

Both kinds of bankruptcy have court fees, and most people hire an attorney. People who use an attorney tend to have more successful outcomes than those who go it alone. 

Creditors don’t have the option to bow out of your bankruptcy. They have to participate and follow the judge’s orders. All types of bankruptcy temporarily halt collection activity. That means that, for example, if your mortgage lender is foreclosing on your home, you could file for bankruptcy protection if you want a chance to get caught up on your payments.

Chapter 7 bankruptcy

If you qualify, Chapter 7 bankruptcy could result in your credit card debt—as well as other types of eligible unsecured debt—being discharged in full (forgiven). Not everyone will qualify for Chapter 7 bankruptcy because of the income requirements. Debt discharged in Chapter 7 bankruptcy isn't considered taxable income.

The downside to Chapter 7 is that you might have to give up some of the things you own. Also, the bankruptcy will remain on your credit report for anywhere from seven to 10 years. 

Chapter 13 bankruptcy

Chapter 13 bankruptcy is easier to qualify for, but your credit card debt is unlikely to be discharged or forgiven. This is a restructuring of your debt with a repayment plan that will last five years (three if your income is low). 

A judge decides how much you have to pay, and you may not agree with that amount or find it comfortable. The calculation works off your disposable income, and could in fact be your entire income after paying for essentials.

Dealing With Credit Card Debt

The sooner you tackle your credit card debt, the better. And this is especially key if you haven't missed any payments yet. 

Before you miss a payment, contact your credit card company and ask for potential solutions. They may offer hardship plans that can help you get back on track. This might also keep them from reporting your account as delinquent, which could hurt your credit score.

You might also consider putting your cards out of reach entirely, or close the accounts. Continuing to add to already-high balances can only worsen the issue and make conquering that mountain of debt even more difficult.

Finally, get in touch with a professional as soon as possible. Whether it’s a paid debt relief company or a nonprofit credit counselor, getting professional help could ensure you’re taking the best steps for your finances.