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Key takeaways

  • Debt relief strategies range from structured programs from credit counselors and settlement companies to DIY strategies and even bankruptcy.
  • Understanding debt restructuring pros and cons is crucial for choosing the right method for your situation.
  • Consulting with financial professionals can provide resources, education, and help you choose the best path to financial stability.

Debt relief programs save lives by helping people manage overwhelming bills and potentially reduce what they owe. There are many different types of relief – consolidation, settlement, credit counseling, or even bankruptcy. You can do it yourself or work with an outside agency. Each method has its own benefits – reduced interest rates or waived fees – and drawbacks – your credit score takes a hit. What method you choose depends on your circumstances and goals.

This article explores the pros and cons of debt restructuring. We’ll walk you through the different strategies, tactics, and services out there so that you can choose the one that speaks to you.

How a debt relief program works

Debt relief is a broad term that covers a whole range of measures used to pay off what you owe. It can be a formal structured program or simply strategies you employ. Some methods reduce the amount you owe while others provide a plan that makes repayment more manageable.

Is a debt relief program a good idea? Yes, it can be a good idea for anyone overwhelmed by bills. Before you randomly choose a program, consider both the advantages and drawbacks. Understanding the debt restructuring pros and cons is critical. Not every program is for everyone. Many will have a negative impact on your credit score and cost money. Make an informed decision that aligns with long-term financial goals.

Types of debt relief programs

Popular programs include:

  • Debt consolidation
  • Debt settlement
  • Credit counseling
  • Debt management plan
  • Bankruptcy

Understanding the debt restructuring pros and cons of each method can help in choosing the right one for your circumstances.

Debt consolidation

Consolidation is when you combine two or more existing debts into one. It can simplify your payments and potentially save you money on interest, but fees may apply. Two common methods are balance transfer credit cards and personal loans.

Pros: Simplifies payments, lowers interest rates, and improves credit score if managed well.

Cons: Initial score dip, may extend repayment period (increase total interest), additional fees, need a very good score

Use a balance transfer credit card

This is when you get a new balance transfer credit card with a promotional 0% APR (or simply a lower APR). You then transfer your high-interest card balances onto the new card and pay it off before the promotional period ends. The reduced interest rate can save you money and help you pay off your balances faster. Fees may apply and you have to pay off your balance before the promotional period ends.

Read more about credit cards!

Apply for a debt consolidation loan

You take out a personal loan at a lower interest rate and use the money to pay off multiple debts. You end up with one monthly payment simplifying your bills and saving you money on interest.

Debt settlement

Debt settlement or credit card modification involves negotiating with creditors to pay a lump sum less than you owe. This approach can significantly lower the amount you need to repay but is inherently risky.

Pros: Reduces total amount paid, provides a quick resolution.

Cons: Severely impacts credit score, potential tax implications, fees from settlement companies, not guaranteed to work

Most people choose to work with a debt settlement company. You stop paying your creditors and instead make monthly payments into a dedicated account. Once enough funds accumulate, the company negotiates with your creditors to accept a smaller lump sum. The idea is that the creditor will agree to a lower amount as they’d rather receive something than nothing.

As with anything else, credit card modification has pros and cons. Yes you can pay less than you owe, but creditors have no legal obligation to negotiate. It can severely impact your credit score, as you have to stop making payments during negotiations. If the forgiven amount exceeds $600 it is considered taxable income. Lastly, companies charge a fee of 15% to 25% of the original amount for their services.

Credit counseling

Credit counseling is offered by both for-profit and nonprofit credit counseling agencies – if you can, go with the nonprofit. The goal is to help people improve their financial health through professional guidance and education.

Pros: Professional guidance, structured repayment plan, potential lower interest rates and waived fees

Cons: Requires closing credit accounts, initial credit score dip, monthly fees for counseling services.

Debt management plans

A debt management plan (DMP) is one of the services offered by credit counselors. The counselor will look at what you owe, your income, and expenses. They will then create a payment plan tailored to your budget. They may negotiate with creditors to get them to agree to reduced interest rates and waived fees. You make one payment each month to the credit counseling agency, and they distribute the money among your creditors according to the agreed-upon schedule. The idea is to make your monthly payments affordable.

For a DMP to work, you have to stick to the plan and may be required to close credit card accounts.

Want to learn more about credit counseling and DMPs?

Click here to read about the pros and cons and see if they’re for you.

DIY debt relief

You can DIY (do it yourself) debt relief like you can with anything else. Most people start with strict budgeting and strategies like the snowball method (prioritize smallest amounts first) and avalanche method (pay off highest interest rates first).

Pros: Full control over repayment plan, no fees, improved financial literacy.

Cons: Requires strong discipline and negotiation skills, no professional support.

You can also negotiate directly with creditors to reduce the amount you owe. You can request lower interest rates, reduced monthly payments, or even settle for a smaller sum. Creditors are often willing to work with you if it means they’ll receive some payment rather than none.

The main advantage of DIY is you’re not paying any fees to a third-party. The drawbacks are that you have to keep yourself motivated and don’t necessarily have the negotiation expertise a professional does. DIY can be a good place to start and then determine if you need extra help.

Avoiding bankruptcy

Bankruptcy is a last resort. While it can offer a fresh start, it comes with significant long-term consequences. Your credit score will take a huge hit – bankruptcy remains on your report for up to ten years – and can impact future borrowing abilities.

Pros: Discharges most debts, offers a fresh financial start.

Cons: Long-term negative credit score impact and potential loss of assets.

Bankruptcy is a long and costly legal proceeding and it’s not even guaranteed to work. Yes, debts can be forgiven, but not all qualify, legal fees add up, and if you file Chapter 13 bankruptcy, you may lose your assets.

Talk to a credit counselor and try other methods before you resort to bankruptcy.

How much debt do you need to file for bankruptcy?

Find out if bankruptcy’s worth it for you.

How do you qualify for debt relief?

How you qualify really depends on the method you’re interested in. In general, you have to have a substantial amount of unsecured debt to qualify.

Unsecured debts include:

  • Credit card debt
  • Personal loans
  • Medical bills
  • Utility bills

Most debt settlement companies require at least $7,500 in unsecured debts, though they would prefer you to have $10,000 to $20,000.

For bankruptcy, experts say it’s only worth it if you owe at least $10,000 due to the costs. To file for Chapter 7, you must prove that you do not earn enough to repay dues and that your income is less than the median income of your state. Otherwise, you can file for Chapter 13.

There is no required amount for credit counseling or a DMP. However, for a DMP to work, you must have a steady enough income to make consistent monthly payments.

Debt consolidation qualifications depend on your credit score. To secure a low-interest loan or balance transfer card, you will have to have good to excellent credit.

Impact on your credit score

credit score

Once again, the impact on your credit score depends on the method chosen. In general, your score will suffer initially and then rebound.

Debt Consolidation: Any time you apply for a new credit account your score will take a dip due to the hard inquiry. As you consistently make on time payments, your score will go up.

Debt Settlement: One of the significant disadvantages of debt restructuring is it will hurt your score. You have to stop making payments, which is the worst thing you can do. Then, the settlement is reported as a negative item, which can further lower your score and remain on your credit report for up to seven years.

Debt Management Plans: Enrolling in a DMP typically requires closing your credit accounts, which can hurt your score. However, as you make consistent payments, your score will improve.

Bankruptcy: Bankruptcy can cause your score to drop by 100 to 250 points and will stay on your report up to ten years.

Sued by a debt collector?

Find out what you can do to win your case.

Alternatives to debt relief programs

If none of those seem like the right fit, there are several alternative strategies to consider.

Increase Your Income: Taking on a second job, freelancing, or joining the gig economy can boost your income.

Reduce Expenses: Create a detailed budget and cut all non-essential expenses. This might involve lifestyle changes such as downsizing housing, eliminating subscriptions, or cooking at home more often.

Sell Assets: Selling unused or valuable items, such as electronics, jewelry, or even a second vehicle, can provide extra cash to cover bills.

Loans from Family or Friends: Borrowing money from family or friends at little to no interest can be a quick way to repay creditors. Ensure the terms are clear to maintain healthy relationships.

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Bottom line

There’s lots to consider when it comes to debt relief. Consider the various options available and your unique circumstances to determine which is the best method for you. A good starting point can be chatting with a nonprofit credit counselor who has the financial education to point you in the right direction.

Ultimately, the goal is to regain control of your finances, pay all your dues, save money, and pave the way for a more secure financial future.

About the author

Rachel Alulis

Rachel Alulis has been the lead editor for Moneyfor’s credit cards team since 2015 and for the financial rewards team since 2023. Before joining Moneyfor, Rachel worked at USA Today and the Des Moines Register. She then established a successful freelance writing and editing business specializing in personal finance. Rachel holds a bachelor’s degree in journalism and an MBA.