Is a Debt Relief Program a Good Idea for You?

You could wind up in debt for so many reasons, some of which are beyond your control. Job loss or a long illness could really put a crimp in your finances. When debt becomes unmanageable, the best thing to do is start looking at ways to solve it—and the solutions are out there. 

 If you owe more than you could reasonably afford to pay back or if you worry about how to make monthly payments that are too high, a debt relief program could be your answer. 

Debt relief is most commonly associated with debt settlement, but there are other options, including debt consolidation, credit counseling, and bankruptcy. Each works differently to help you resolve your debt issue, and each has pros and cons.

We’ll walk you through the techniques you could use to get rid of your debt so you can find the method that works best for you. Take a breath and know that there are many different ways to get help with your debt.

What Is a Debt Relief Program? 

Simply put, debt relief is any action you can take to get out from under unaffordable debt—whether that’s a debt settlement program, bankruptcy, debt consolidation, or credit counseling. 

Often, people use debt relief program to refer to a debt settlement program. In debt settlement, you or a debt relief professional negotiate with your creditors to accept less than you owe to settle your debts. 

Debt settlement isn't the only type of debt relief program you might consider. Every financial situation is different, so if you’re struggling with debt, weigh your options to find the best one for your needs. 

Debt settlement program

If you’ve been through a financial hardship and can't afford your debts, a debt settlement program could be worth exploring. You’ll meet with a trained debt expert who will work on your behalf to negotiate an agreement with your creditors to accept less than you owe. 

You’ll make deposits into a dedicated account that you control. Once you agree to a settlement offer, your creditor gets paid from the account and your debt will be cleared. 

Debt consolidation

If you can afford to make payments but are juggling multiple balances and high interest rates, a debt consolidation loan might be the right choice. This would mean replacing your existing debts with a lower-interest fixed-rate loan. Then, you pay off that loan. 

Some people take out personal loans to consolidate debt, though homeowners might turn to  a home equity loan or home equity line of credit (HELOC). The goal is to simplify your finances and reduce your interest costs.

Consolidation frees up your credit cards again, which could lead to more high-interest debt if you're not careful. Only consider it if you have a plan to avoid ending up with high balances again. 

Debt management plan and credit counseling

If you need help getting organized, a debt management plan (DMP) created by a credit counselor could be just the ticket. A DMP is designed to entirely pay off your balances. You’ll be required to stop using your credit cards while you’re enrolled. 

This option works best if you can afford your debts since the monthly payments could be high depending on how much you owe. DMPs typically require making payments for three to five years.

Bankruptcy

If you have few or no assets and you can qualify for Chapter 7, bankruptcy could be a worthwhile option. Bankruptcy is a legal process to clear debts, and Chapter 7 bankruptcy could let you get rid of your unsecured debts, or debts not backed by collateral (something of value). Chapter 13 bankruptcy could be an option if you have assets you want to save such as equity in your home.

You May Like These

The psychological benefits of settling your debts 

How Long Does Debt Relief Take?

Is Debt Settlement Worth It?

Is a Debt Relief Program a Good Idea?

Debt relief programs can work well under the right circumstances—these programs have already helped millions of Americans get rid of unmanageable debt by reducing the amount they owe. They could be a good fit for people who’ve been through a financial hardship and who can no longer keep up with their debt payments. 

When you owe a lot of money to creditors, it’s normal to worry. You could be losing sleep, and concern over your mounting debt may be affecting your everyday life. Maybe you’ve already missed payments to creditors, and you’re getting calls and letters from debt collectors, which adds to your stress. 

If your debt is from a major life change that made it impossible to pay your bills, you might also still be coping with the aftermath. Perhaps you were laid off from your job, lost your spouse to death or divorce, or had a serious illness or injury. Any of these situations can make dealing with debt stress even harder. So it might be worth exploring debt relief programs to get a financial reset. 

Participating in a debt relief program isn't entirely painless. The program typically lasts two to four years. During that time, you might be harassed by collectors. Missing payments could already be damaging your credit score, and as the debt relief company negotiates with your creditors, you’ll likely fall farther behind on what you owe. 

However, completing a debt relief program could give you a chance to start creating a better financial future. You could start rebuilding your credit score right away. 

So the upsides potentially outweigh the downsides, but it depends on your specific situation and goals. Let’s explore when a debt relief program is best and when other options might work for you.

Pros and Cons of a Debt Relief Program

Like any other type of debt relief, enrolling in a debt relief or debt settlement program has upsides and downsides. 

Pros of a debt relief program

Professional help with debt. Unlike negotiating with creditors yourself, when you enroll in a debt relief program you get to work with experienced debt experts. These people likely know your creditors and have experience with the hard work of getting them to agree to a lower payoff amount for your debt balances. 

A single monthly payment. If you’re juggling multiple payments and stressing over accidentally losing track of when they’re due, you might like the simplicity of a debt relief program. You’ll make just one monthly payment to your dedicated account, an FDIC-insured bank account that you open and are in control of. When you reach an agreement with a creditor, the money in this account is used to settle your debt. 

Lower debt payoff balances. A debt relief program could help you get rid of your debt for less than you owe. Depending on your starting balances, you could settle your debt for a fraction of the total. 

Generally faster than minimum payments. Credit card minimum payments are designed to keep you in debt and paying interest for years. Going through a debt relief program is usually faster than paying off your debt with minimum payments. 

Cons of a debt relief program

Negative credit impact. Debt relief programs often come with a credit score hit. You may decide to stop making payments to your creditors to demonstrate financial distress and save up for negotiation, and missed payments usually cause a lot of credit score damage. But if you’re already missing payments on your debts, the damage may not be as noticeable. And it's absolutely possible to rebuild your credit score once your debt is behind you. 

Program duration. A debt relief program generally takes two to four years from start to finish. It’s a solid time commitment, but credit card minimum payments would likely take far longer. Debt consolidation loans, DMPs, or Chapter 13 bankruptcy payments could also mean being in debt for longer. 

Only unsecured debts qualify. If you have secured debts, like a mortgage or auto loan, they won’t qualify for a debt relief program. These loans have collateral, such as a house or car, so your creditor could take the collateral and sell it to recoup their losses. Debt relief programs are for unsecured debts, like credit card balances, personal loans, and medical debt. 

When to Consider a Debt Relief Program

You might be wondering how to know when a debt relief program is right for you. Here are a few signs: 

• You’re going through financial hardship that’s making debt payoff in full difficult or impossible. For example, maybe you lost your job, or your main household breadwinner passed away. 

• You don’t have the time or confidence to negotiate with creditors yourself. A debt relief program’s experts do the hard work for you, by asking your creditors to reduce what you owe. 

• You’re having a hard time keeping up with minimum payments. Credit card minimum payments are intended to keep you in debt over a long period of time. And if you have high balances, those minimum payments could also be very high. 

• Your debts are unsecured. If you’re struggling to pay a mortgage or auto loan, a debt relief program can’t help. Debt relief programs also don’t work for back payments for child support, or debts you owe to the government, like taxes. 

If you’re treading water in the wake of a financial hardship or otherwise can’t envision a way to pay off what you owe, a debt relief program should be on your shortlist of options to move forward and get a financial do-over. 

When a Debt Relief Program Is Better Than Bankruptcy

A debt relief program could be a better option than bankruptcy if you don’t:

• Qualify for Chapter 7 bankruptcy

• Want your debt situation to become public record

• Want a bankruptcy on your credit report

Bankruptcy could be a better option than a debt relief program if you do:

• Have a lot of unsecured debt and few or no assets

• Qualify for Chapter 7 bankruptcy, which is means-tested 

• Have a home at risk of foreclosure and don’t want to lose it

Debt settlement and bankruptcy are two options for people who can’t afford to fully repay their debts, but bankruptcy has a few unique features. 

Bankruptcy is a legal process for clearing debts 

Individuals typically file Chapter 7 or Chapter 13. 

In a Chapter 7 bankruptcy, you could walk away from your eligible debts within a few months of filing. However, you may also lose some of your possessions. For instance, you may have to turn over some of your assets to the court, aside from a modest vehicle, some home equity, tools needed for your job, and other pieces of personal property. Chapter 7 is sometimes called a liquidation bankruptcy. 

Before you can file for Chapter 7, you also must pass a means test to determine if you can afford the monthly payment on your debt. If your income is too high, you won’t be eligible for Chapter 7. In that case, you could choose to file Chapter 13 bankruptcy instead. 

Chapter 13 bankruptcy is a structured repayment plan. You don’t have to give up any assets, but you’ll have to pay all your disposable income to the court for three years if you’re low-income, or five years if your income isn’t low. Chapter 13 could help you stop foreclosure and keep your home.

Here are some key differences between Chapter 7 and Chapter 13 bankruptcy to help you decide which is better.

Here are a few additional considerations before you move forward with bankruptcy. 

• When you file for bankruptcy, a public record is created with the court, and bankruptcy records can be requested at a bankruptcy clerk’s office. Your debt doesn’t necessarily become general knowledge, but information about your case could be accessible to people who look for it. 

• Bankruptcy stays on your credit report for up to 10 years (Chapter 7) or seven years (Chapter 13). A lender, future employer, or anyone else with permission to check your credit report could find out that you’ve filed. Bankruptcy could also cause a lot of credit score damage though you could start rebuilding as soon as your bankruptcy is complete.

• You’ll probably have to hire an attorney, as the success rate is a lot lower for people who self-represent in bankruptcy court. About half of Chapter 13 cases fail.

• All types of bankruptcy require court fees. If you’re a low-income filer, you can apply for a fee waiver.

Bankruptcy sounds serious, and it is. But depending on your financial situation, it could still be the right choice for you. Filing bankruptcy doesn’t mean you’ve failed—it means you’ve encountered financial hardship and taken the steps to get on a better financial path. There’s no shame in that. 

When a Debt Relief Program Is Better Than Debt Consolidation

Debt relief programs and debt consolidation programs are two very different strategies for dealing with debt.

Debt relief could be a good option for someone struggling to fully repay their debts. If you’ve been through a financial hardship and as a result, you owe more money than you are able to pay off, debt relief could be right for you. 

Debt consolidation may be right for someone who can afford to repay their debts in full but who wants to reduce the number of payments or lower their interest rate. 

A debt relief program could be a better strategy if:

• You’ve been through a financial hardship and have more debt than you can afford to fully pay off. 

• You want to settle debts for less than you owe. 

• Your credit score isn’t high enough to qualify for a consolidation loan that you’re happy with.

Debt consolidation could be a better idea if:

• You can afford to repay your debts, but you want better financial organization.

• You have at least a fair credit score (a FICO Score of 580 or higher) and can qualify for a lower interest rate than you pay now.

• You have a plan for avoiding new credit card debt after you pay it off with your consolidation loan.

How debt consolidation works

Debt consolidation means using a new loan to pay off multiple other debts, which could simplify your finances. Debt consolidation could also lower your monthly payment if the new loan has a lower interest rate than you currently pay. You might consolidate using a personal loan, home equity loan, or with an introductory balance transfer offer on a credit card. 

You can consolidate credit card balances, medical bills, personal loans, and even auto loans. Just about any debt is fair game, but it’s rarely a good idea to consolidate to a rate that’s higher than your current rate.  

Debt consolidation could:

• Reduce the number of monthly payments you have to make 

• Lower your monthly payment 

• Potentially reduce interest costs over time

A lower interest rate could mean a lot of savings. However, if you extend your payoff time, you could end up paying more in total interest even if your rate is lower. 

The ideal scenario would be to keep your payment schedule the same and reduce your interest rate. That way, you benefit from lower monthly payments and some breathing room in your budget. Another good option: Make higher payments if possible and enjoy a faster payoff.  

How to get a debt consolidation loan

To get a debt consolidation loan, you must satisfy the lender’s requirements. This typically means having a certain minimum income and credit score. 

If you’re already behind on your payments or your credit cards are maxed out, your credit score may have taken a big hit. That could take you out of the running for a new loan at terms you’re happy with.

The main danger with debt consolidation is the possibility that you’ll run up your credit card balances again after you pay them off with the loan. That could leave you with even more debt. Be sure you have a plan for avoiding this common pitfall. If you struggle with habitual overspending, address this problem before considering debt consolidation. 

Freedom Debt Relief is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

When a Debt Relief Program Is Better Than Credit Counseling

A debt relief program could be a better option than credit counseling if you truly can't afford to pay back what you owe. If you can't afford your debt payments and other bills, debt relief may be more appropriate. 

Credit counseling could help you with budgeting and financial management, as long as you enroll in a debt management program (DMP) and agree to make regular payments to pay off the entire balances you owe your creditors. The payments to get to a complete debt payoff could be quite high. But your credit counselor may negotiate to a break on your interest rate or have fees waived. 

Budgeting is often a first step to taking back control of your money. It may sound fusty and old-fashioned, but it really can work. Nowadays, budgeting apps can do the hard work for you. 

How to Choose the Right Debt Relief Option

Here’s how to choose which option is the best for you. It comes down to a careful look at your financial situation, both now and going forward. 

Assess your financial situation

Ask yourself the following questions: 

• How much money do I owe? Is it secured or unsecured debt?

• Does my household income allow me to pay down my balances? 

• How is my credit score? 

• Is my mental or physical health being impacted by my debt? 

The answers will help guide you. If you need help getting organized to pay off debt but have enough income to pay what you owe, debt consolidation or a debt management plan might be right. If you’ve been through financial hardship and don’t have the resources to pay back what you owe, bankruptcy or debt relief could be the better options. 

Do your research and watch out for red flags

Once you’ve pinpointed your best debt relief option, it’s time to do some research. The best debt relief companies offer a free consultation, so you get a debt professional to look over your finances and help you decide what to do. 

Explore debt relief companies that are accredited, since this indicates that they’re held to industry standards. Freedom Debt Relief is a member of both the Association for Consumer Debt Relief (ACDR) and the International Association of Professional Debt Arbitrators (IAPDA).

One major red flag is if a debt relief company asks for upfront payment. A legit debt relief company won’t do this—and in fact, it’s against the law to charge for debt relief before any of your debts have been settled. 

It’s also a red flag if a debt relief company guarantees they can settle your debts, or claims they can settle a debt for a specific amount. Your creditors don’t have to agree to negotiate or to reduce your balance at all. 

And be sure to read and heed reviews of debt relief companies on review sites like Trustpilot or the Better Business Bureau—the best companies will have reviews from satisfied customers. 

Get Started Today

Whatever you decide, the best time to tackle your debt is today. Scout all the options for debt relief and make a plan for a brighter financial future. Need some professional advice to get started? Contact Freedom Debt Relief today.