If you’re struggling with debt, there are several debt relief options that may help you manage, repay, restructure, or potentially reduce what you owe. The right approach depends on your total debt, income, monthly budget, credit situation, and ability to make your payments.
Common debt relief options include credit counseling, debt management plans, debt consolidation loans, credit card hardship programs, balance transfers, debt settlement, and bankruptcy. Each option works differently, and each has potential benefits, costs, and consequences to consider.
This guide explains how the major debt relief options work so you can better understand which approaches may fit your financial situation.
What Is Debt Relief?
Debt relief is a general term for strategies or programs that help people manage, repay, restructure, or potentially reduce their debt.
Depending on your circumstances, debt relief may involve:
- Creating a structured plan to repay your existing debt
- Reducing the interest rates on certain debts
- Combining multiple debts into one payment
- Negotiating different repayment terms with creditors
- Working directly with creditors through a hardship program
- Settling certain debts for less than the full amount owed
- Using legal protections such as bankruptcy
There is no single debt relief solution that works for everyone. Some options allow you to repay your debts in full, while others may reduce the amount you ultimately repay. Some involve borrowing new money, while others work with your existing creditors.
Understanding the differences can help you evaluate your options before committing to a particular debt relief program or strategy.
7 Debt Relief Options
1. Credit Counseling
Credit counseling provides an opportunity to review your financial situation with a trained counselor and discuss ways to manage your debt.
A nonprofit credit counseling organization can help you review your income, expenses, debts, and budget. Depending on your circumstances, a counselor may recommend budgeting changes, direct repayment strategies, a debt management plan, or other alternatives.
If you are looking for nonprofit credit counseling, a counseling session can be a useful first step because you can discuss your situation before deciding whether a particular debt relief program is appropriate.
Credit counseling does not necessarily mean enrolling in a debt management plan. You can receive financial guidance without enrolling in a DMP.
2. Debt Management Plans
A debt management plan (DMP) is a structured repayment program typically designed for certain types of unsecured debt, particularly credit card debt.
With a debt management plan, you generally do not take out a new loan. Instead, a credit counseling organization works with participating creditors to establish repayment terms. You make one monthly payment to the counseling organization, which then distributes the funds to your creditors.
Depending on the creditors and your circumstances, a DMP may provide benefits such as reduced interest rates, lower monthly payments, or the elimination of certain fees.
You can learn more about how a debt management plan works and what is involved before deciding whether it is appropriate for you.
A debt management plan is different from debt settlement. The goal of a DMP is generally to repay the enrolled debt in full under modified terms rather than negotiate to pay less than the amount owed.
3. Debt Consolidation Loans
A debt consolidation loan uses a new loan to pay off multiple existing debts, leaving you with one loan and one monthly payment.
For example, someone with several high-interest credit card balances might qualify for a personal loan with a lower interest rate and use the personal loan to pay off credit card debt.
Potential advantages can include:
- One monthly payment instead of several
- A potentially lower interest rate
- A defined repayment period
- A simpler payment schedule
However, debt consolidation loans do not automatically reduce the amount of debt you owe. You are still responsible for repaying the new loan.
Whether consolidation saves money depends on factors such as the new interest rate, loan term, fees, and whether you continue adding new debt to your credit cards.
Learn more about credit card debt consolidation before deciding whether a consolidation loan makes sense for your situation.
4. Credit Card Hardship Programs
A credit card hardship program may be available from a credit card company when a borrower is experiencing financial difficulty.
Depending on the creditor and circumstances, a hardship program may temporarily or permanently modify certain account terms. Possible changes can include reduced interest rates, lower payments, waived fees, or a temporary payment arrangement.
Hardship programs are generally designed to address financial difficulties directly with the creditor.
If your financial hardship is temporary, contacting your credit card companies and asking about available credit card hardship programs may be worth considering before pursuing more significant debt relief measures.
5. Balance Transfer Credit Cards
A balance transfer involves moving debt from one or more credit cards to another credit card, often one offering a promotional interest rate.
A balance transfer can potentially reduce interest costs during the promotional period and give you an opportunity to pay down the balance more quickly.
However, balance transfers can involve fees, and promotional interest rates eventually expire. The standard interest rate after the promotional period may also be substantially higher.
A balance transfer generally works best when you have a realistic plan for paying down the transferred balance before promotional terms expire.
6. Debt Settlement
Debt settlement involves negotiating with creditors or debt collectors to resolve certain debts for less than the full amount owed.
Debt settlement is different from a debt management plan. A DMP generally involves repaying the enrolled debt in full under modified terms, while debt settlement seeks to resolve debt for less than the full balance.
Debt settlement can have significant consequences and may affect your credit, taxes, fees, and ability to keep accounts current. Consumers should understand the costs and risks before entering a settlement program.
Not every type of debt is eligible for settlement, and creditors are not required to agree to a settlement.
7. Bankruptcy
Bankruptcy is a legal process that can provide relief from certain debts for people who meet the applicable legal requirements.
Depending on the type of bankruptcy and the individual’s circumstances, bankruptcy may result in the discharge or restructuring of certain debts. It can also have significant effects on credit and finances.
Because bankruptcy involves legal rights and obligations, anyone considering it should understand the applicable rules and consider obtaining advice from a qualified bankruptcy attorney.
Bankruptcy is not simply another form of debt consolidation or credit counseling. It is a legal process with consequences that can extend beyond the immediate repayment of debt.
Debt Relief Options Compared: Costs, Loans, Interest & Debt Reduction
The major debt relief options differ in how they work and what they are designed to accomplish.
| Debt relief option | New loan? | Generally repay debt in full? | Potential interest savings | Potential principal reduction |
|---|---|---|---|---|
| Credit counseling | No | Depends on solution | Potentially | Generally no |
| Debt management plan | No | Generally | Yes | Generally no |
| Debt consolidation loan | Yes | Yes | Potentially | No |
| Credit card hardship program | No | Generally | Potentially | Generally no |
| Balance transfer | No* | Yes | Potentially | No |
| Debt settlement | No | Not necessarily | Potentially | Potentially |
| Bankruptcy | No | Not necessarily | N/A | Potentially |
*Balance transfers may involve a new credit account rather than a traditional loan.
The important distinction is that debt relief does not always mean debt reduction. Some programs primarily make repayment more manageable by lowering interest or simplifying payments, while other approaches may potentially reduce the amount ultimately repaid.
Debt Relief vs. Debt Management vs. Debt Consolidation
The terms debt relief, debt management, and debt consolidation are sometimes used interchangeably, but they are not the same thing.
Debt relief is the broadest term. It can refer to many different strategies for dealing with debt, including credit counseling, debt management plans, consolidation, hardship programs, settlement, and bankruptcy.
Debt management generally refers to strategies for organizing and repaying existing debt. A debt management plan is one specific type of structured repayment program.
Debt consolidation generally means combining multiple debts into one payment. A consolidation loan does this by paying off existing debts with a new loan.
For example, a person might use a debt consolidation loan to combine credit card balances, while another person might use a debt management plan to make one monthly payment toward several credit card accounts without taking out a new loan.
Understanding these distinctions is important when comparing debt relief programs.
How to Choose a Debt Relief Option
There is no single solution that is appropriate for every financial situation. Consider the following questions before choosing a debt relief strategy.
How much debt do you have?
Start by listing your balances, interest rates, minimum payments, and types of debt.
Knowing exactly what you owe can help determine whether you can manage the debt yourself or whether you may benefit from professional assistance.
Can you afford your current payments?
If you can comfortably make your minimum payments and have enough income to pay more than the minimum, a self-directed repayment strategy may be an option.
If your minimum payments consume too much of your monthly budget, you may need to explore alternatives that can potentially reduce your monthly payment or interest costs.
Is your financial hardship temporary or ongoing?
A temporary financial problem may be addressed through budgeting changes, a balance transfer, or a credit card hardship program.
A longer-term financial problem may require a more structured solution, such as credit counseling or a debt management plan.
What types of debt do you have?
Not all debt relief programs work with every type of debt.
Credit card debt and other unsecured debts may be treated differently from secured debts such as mortgages or auto loans. Student loans, medical bills, tax obligations, and other debts may also have different rules.
Before enrolling in any program, make sure you understand which of your debts are eligible.
What are the costs?
Look beyond the monthly payment.
Consider:
- Interest rates
- Program or service fees
- Origination fees
- Balance-transfer fees
- Potential tax consequences
- The total amount you will repay
- The length of the repayment period
A lower monthly payment does not necessarily mean a lower total cost.
Debt Relief and Self-Directed Debt Repayment
Not everyone needs a formal debt relief program.
If you can afford to make your minimum payments and have additional money available each month, you may be able to use a self-directed repayment strategy.
Two common approaches are the debt snowball method and the debt avalanche method.
The debt snowball method prioritizes debts with the smallest balances first, while the debt avalanche method prioritizes debts with the highest interest rates first.
These approaches do not change the terms of your debts. Instead, they provide a framework for deciding where to direct extra payments.
For people who are able to manage their debt independently, these strategies can be alternatives to formal debt relief programs.
Does Debt Relief Hurt Your Credit?
The effect of debt relief on your credit score depends on the specific option you choose and how your accounts are handled.
For example, applying for a new consolidation loan can result in a hard credit inquiry, while closing credit card accounts may affect your available credit and utilization.
A debt management plan is different from debt settlement or bankruptcy because the goal is generally to repay the enrolled debt in full under modified terms.
The most important consideration is to understand exactly how a particular program will affect your accounts, payments, credit reports, and ability to use credit before enrolling.
There is no universal answer to whether “debt relief” will help or hurt your credit because debt relief encompasses several different approaches.
What Is the Best Debt Relief Option?
There is no single debt relief option that is best for everyone.
The appropriate approach depends on factors such as:
- How much you owe
- Your income and monthly expenses
- Your interest rates
- Whether you can afford your current payments
- The types of debt you have
- Whether your financial hardship is temporary or ongoing
- Your ability to qualify for new credit
- Whether you are able to repay your debts in full
For some people, a self-directed repayment strategy may be sufficient. Others may benefit from credit counseling, a debt management plan, consolidation, a hardship program, or another approach.
The important step is understanding how each option works before making a decision.
When Should You Consider Credit Counseling?
Credit counseling can be useful when you are unsure which debt relief option makes sense for your circumstances.
You may want to consider talking with a credit counselor if:
- You are struggling to keep up with multiple credit card payments
- Your interest rates are making it difficult to reduce your balances
- You are only making minimum payments
- You are using credit cards to pay regular living expenses
- You have fallen behind on payments
- You are receiving collection calls
- You have tried to repay your debt on your own without success
- You want help creating a realistic budget and repayment plan
A credit counseling session does not necessarily mean you will enroll in a debt management plan. A counselor can review your financial situation and explain potential options.
American Credit Foundation offers a free financial consultation to help consumers understand their debt and explore potential solutions.
Debt Relief Options: Frequently Asked Questions
Debt relief is a broad term for strategies and programs that help consumers manage, repay, restructure, or potentially reduce debt. Options can include credit counseling, debt management plans, debt consolidation, hardship programs, debt settlement, and bankruptcy.
Common debt relief options include credit counseling, debt management plans, debt consolidation loans, credit card hardship programs, balance transfers, debt settlement, and bankruptcy. The appropriate option depends on your financial circumstances and the types of debt you have.
Debt relief is a broad term covering multiple strategies for dealing with debt. Debt consolidation is one specific strategy that combines multiple debts into one payment, often through a new loan or another consolidation method.
It depends on the debt relief option. Different approaches can affect your credit differently. Before enrolling in a program, ask how it will affect your accounts, payment history, credit utilization, and credit report.
Some debt relief options may potentially reduce the amount you repay, while others are designed to help you repay the full amount under different terms. Debt settlement and certain bankruptcy proceedings may potentially reduce or discharge qualifying debt, while debt management plans generally aim to repay enrolled debts in full.
Start by reviewing your debts, interest rates, income, expenses, and ability to make your current payments. Then compare the costs, risks, repayment terms, and potential effects of the available options. A qualified credit counselor can also help you evaluate your choices.
Get Help Understanding Your Debt Relief Options
If you’re struggling with debt and aren’t sure where to start, you don’t have to figure everything out on your own.
American Credit Foundation provides nonprofit credit counseling and can help you review your financial situation, understand your available options, and determine whether a debt management plan or another strategy may be appropriate.
A free consultation can help you understand your options before you make a decision.