1. DEBT RELIEF

Is a Debt Relief Program a Good Idea for You?

Is a Debt Relief Program a Good Idea for You
BY Peter Warden
Jun 18, 2024
Key Takeaways:
  • A debt relief program could be a better option than bankruptcy if you don't want your debt situation to become public record or you don't qualify for Chapter 7.
  • A debt relief program may be a good idea if you can't qualify for a good debt consolidation loan or can't afford to repay your debts in full.
  • A debt relief program may be a more robus solution than credit counseling if you need more than guidance.

Broadly speaking, debt relief is any strategy that brings you financial relief when your debt becomes large enough to be tough to handle. When people talk about debt relief programs, they are usually talking about debt settlement. That’s the process of negotiating with your creditors to accept less than the full amount you owe, and forgive (or relieve) the rest. 

There isn’t a form of debt relief that’s quick or easy or without consequences. But a debt relief program could help you get rid of debt more quickly than by making minimum payments.

Is a debt relief program a good idea?

Debt relief programs can work amazingly well. They have already helped millions of Americans escape from unmanageable debt (read some success stories) by cutting the amount they owe. 

Debt relief programs aren’t entirely painless. The program typically lasts two to four years. During that time you might be harassed by collectors. Your credit standing could suffer (although there are other debt strategies that are also harmful to your credit). 

Indeed, some folks may have better choices for reining in their debts and finding peace of mind. Weigh up the pros and cons of each of your options before deciding on a specific strategy. 

Let’s explore when a debt relief program is best and when other options might suit you better.

When a debt relief program is better than bankruptcy

A debt relief program could be a better option if:

  • You don’t qualify for Chapter 7 bankruptcy

  • You don’t want your debt situation to become public record

  • You don’t want a bankruptcy on your credit report

Bankruptcy could be a better option if:

  • You have a lot of unsecured debt and few or no assets

  • You qualify for Chapter 7 bankruptcy

  • Your home is under threat of foreclosure and you don’t want to lose it

Debt settlement and bankruptcy are both for people who can’t afford to fully repay their debts. 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 can walk away from your eligible debts within a few months of filing. You could also lose some assets. For instance, if you have a second home, the court may force you to sell it and use the money to repay your creditors. 

Before you can file for Chapter 7, you have to pass a means test. The court will decide if you can afford a monthly payment. If you can, you won’t be eligible for Chapter 7. You’ll file Chapter 13 instead. In a Chapter 13 bankruptcy, you don’t have to give up any assets, but you’ll have to pay all of your disposable income to the court for three years if you’re low income, or five years if your income isn’t low. 

Here are a few highlights to consider:

  • Bankruptcy is public.

  • About half of Chapter 13 cases fail.

  • You’ll probably have to hire an attorney (the success rate is a lot lower for people who self-represent).

  • All types of bankruptcy require that you pay court fees.

When a debt relief program is better than debt consolidation

A debt relief program could be better than debt consolidation if:

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

  • You can’t afford (and won’t soon be able to afford) to fully pay off your debts

Debt consolidation could be a better idea if:

  • You can afford to repay all of your debts but you want better financial organization

  • You can qualify for a lower interest rate

  • You have a plan for avoiding new credit card debt after you pay it off with an installment loan

How debt consolidation works

Debt consolidation is when you get a new loan and use it to pay off multiple other debts. It’s a way to streamline your finances. You could also lower the cost of your debt if you get a new loan with a lower interest rate than what you’re currently paying. 

You can consolidate credit card balances, medical bills, personal loans, private student loans, and even auto loans. Just about any debt is fair game, but it’s usually not a good idea to consolidate to a rate that’s higher than your current rate.  

Debt consolidation can reduce the number of monthly payments you have to make. If you get a lower interest rate, you could end up with a lower monthly payment and some relief on your budget. Or you could stick with a higher and faster payoff.  

To get a debt consolidation loan, you have to satisfy the lender’s requirements. If you’re already behind on your payments or your credit cards are maxed out, your credit score may have taken a hit big enough to put you out of the running for a new loan at terms you’re happy with.

If you do qualify and take out a new loan, consolidating may help you improve your credit standing. Your score is likely to dip by a few points when you apply (that’s normal), but loan debt doesn’t affect your credit score the way credit card debt can. So if you move credit card balances to an installment loan, your score could improve.

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 struggling with even more debt. So, take care. 

When a debt relief program is better than credit counseling

A debt relief program could be a better option than credit counseling if you need financial help in addition to guidance with your budget and general finances.

Credit counseling can always be helpful. But it’s a source of advice rather than practical help.

It’s great if you’re just getting by and you’re worried about the future. Your counselor can assess your situation and suggest how you can make improvements.

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

Of course, it’s different if things have gotten a bit beyond your control. No amount of budgeting can make a limited income cover the essentials (including debt payments) that are higher than the funds coming in.

That’s the time you may have to choose between a debt relief program, debt consolidation, or bankruptcy.

We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during June 2024. The data uncovers various trends and statistics about people seeking debt help.

Credit card balances by age group for those seeking debt relief

How do credit card balances vary across different age groups? In June 2024, people seeking debt relief showed the following trends in their open credit card tradelines and average credit card balances:

  • Ages 18-25: Average balance of $7,378 with a monthly payment of $209

  • Ages 26-35: Average balance of $10,797 with a monthly payment of $300

  • Ages 36-50: Average balance of $14,340 with a monthly payment of $405

  • Ages 51-65: Average balance of $14,364 with a monthly payment of $420

  • Ages 65+: Average balance of $14,837 with a monthly payment of $397

These figures show that credit card debt can affect anyone, regardless of age. Whether you're just starting out or nearing retirement, managing credit card debt can be challenging.

Manage Your Finances Better

Understanding your debt situation is crucial. It could be high credit use, many tradelines, or a low FICO score. The right debt relief can help you manage your money. Begin your journey to financial stability by taking the first step.

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