Man in debt needs relief

Flip through the channels on your TV, and you’re bound to see an ad offering debt relief.


American families in debt have a lot of it. In fact, the average American household with a credit card balance has an eye-popping $9,333 of debt, according to the U.S. Census Bureau and Federal Reserve.

These ads promise relief, but leave you wondering how do these debt relief programs work?

Let’s dive in.

Debt Relief Options Process

Generally, there are four types of debt relief:

  1. Debt management programs
  2. Debt consolidation loans
  3. Debt settlement
  4. Bankruptcy

Which one is right for you depends entirely on your circumstances.

You could choose on your own, of course, and you may make a perfectly acceptable decision. But even the best professionals at the most elite ranks of sports lean on coaches. World No. 1 golfer Brooks Koepka has Claude Harmon III. World No. 1 tennis player Novak Djokovic has Marián Vajda.

If they need coaches, chances are you need coaches.

In the world of debt relief, nonprofit credit counselors — such as those at InCharge Debt Solutions — are the go-to professionals. A certified credit counselor will provide financial advice — including how to create a budget and your options for systematically paying down debt — as well as help keep you on track.

A credit counselor also will explain, in detail, the various types of debt relief programs, why one or the other might be right — or disastrous — for you, and, using his/her expertise, fit you with the best relief plan for your situation.

So, gather your financial information — income, recent pay stubs, assets, liabilities — and contact, either by telephone or internet, a certified nonprofit credit counseling agency.

You’ll be glad you did.

Types of Debt Relief

Again, there are, generally, four types of debt relief: debt consolidation loans, debt settlement, debt management, and bankruptcy.

Ideally, debt-relief plans should guide you toward becoming debt free in three to five years. Each has benefits; each has drawbacks. That’s why choosing the right plan for you is crucial, as well as why professional guidance is pivotal.

Let’s have a peek at each, so you’ll at least be familiar with your options when you speak or correspond with your certified credit counselor.

Debt Management Program

Debt management programs involve third parties acting as liaisons between you and your creditors, but with a key difference: They won’t wreck your credit long term.

Reputable debt management companies arrange lower interest rates and lighter monthly payments with an eye to reorganizing your liabilities that is affordable, but also payable in full.

Debt Management Program Pros:

  • A single, affordable monthly payment sent to your debt-management company for distribution among your creditors.
  • Less of a hit to your credit rating, and the damage will be short term.
  • A date-certain when you will become debt-free (usually 36 to 60 months).
  • You won’t go it alone. You will have a dedicated debt counselor to oversee your program, and to coach you through the tough spots.
  • Your interest rates will fall, and your fees likely will be waived.
  • You avoid bankruptcy, but retain it as an option.
  • Creditors and collectors end their harassment.

Debt Management Program Cons:

  • You will be obliged to cancel most, if not all, of your unsecured access to credit, principally credit cards.
  • Because the Big Three credit-tracking agencies weigh access to credit in their ratings, canceling credit cards while you still have debt will lower your credit number for the first few months you’re in the program.
  • Much of what debt-management companies do — contacting creditors, negotiating better terms, setting a new payment schedule — can be achieved on your own.

Debt Consolidation Loans

Alone among the Big Four, traditional debt consolidation is a do-it-yourself enterprise. The process involves lumping some or all of what you owe into a single new loan: a personal loan, a low- or zero-interest credit card, a cash-out refinance of your home.

If you have good credit, sufficient income, and the discipline to see it through, a debt consolidation loan could be your ticket out.

Debt Consolidation Loan Pros:

  • Single monthly payment. You won’t have to keep track of multiple closing and due dates.
  • Lower interest rate. Average credit card rates are in the high teens; miss a payment, even by a few days, and you can wind up paying rates in the high 20s, or even low 30s. Interest on most personal loans usually is a fraction of those rates, allowing you to take a bigger monthly chunk out of your debt.
  • Making minimum payments? You may never climb out. Debt consolidation can put you on a glide path to debt freedom in 36 to 60 months.
  • You can keep your credit card accounts open.

Debt Consolidation Loan Cons:

  • You’re taking on another loan to pay back the loan you got from the credit card company.
  • Depending on the length of the loan, you could end up paying more in interest, despite the lower rate.
  • Going it alone means it’s up to you to stick to a budget and avoid temptation. Otherwise, you could end up more deeply in debt.

Debt Settlement

While it’s possible to achieve debt settlement — also known as debt arbitration, debt negotiation, or credit settlement — on your own, most often you contract with a third party to intervene on your behalf, attempting to settle your liabilities in a lump sum payment for some fraction of what you owe.

In debt settlement, you stop making payments to your creditors. Instead, you make payments to a savings account you control that builds over time. Meanwhile, the debt settlement company attempts to negotiate payment plans, interest rates, or a lump sum payoff your creditor(s) will stamp as “settled.”

However — and this is important — your account will not be stamped “paid in full.”

You should know this about the process going in: No matter what you heard on the radio, you don’t have a “right” to settle unsecured debt for pennies on the dollar. Debt settlement is risky at best.

Debt Settlement Pros:

  • You may lower your debt amount.
  • You possibly avoid bankruptcy.
  • Creditor and collections harassment ceases.

Debt Settlement Cons:

  • Creditors are not obligated to negotiate, and some refuse to negotiate with debt settlement companies at all. Your credit counselor will help you sort out which is which.
  • You could wind up deeper in the hole. When you stop making payments, you could trigger late fees or higher interest, or both. There’s no guarantee these will be waived.
  • If your debt is successfully settled, the IRS will consider the forgiven portion of your debt as regular income, taxable in the settlement year.
  • Your credit rating will take a dive, both because you stopped making payments and, if you settle successfully, because you walked away from paying your debt in full.
  • Even if you have several accounts that remain in debt-settlement limbo, you’re obligated to start paying fees the moment the company has settled that first account.


Bankruptcy means either discharging certain qualifying debts (Chapter 7, straight bankruptcy), or reorganizing them (Chapter 13, reorganization) so they can be paid in full over a specified timeframe.

Bankruptcy isn’t for everyone. Falling behind in your payments and finding it hard to make ends meet does not a bankrupt make. Instead, you must be truly insolvent, with no obvious way to recover.

Bankruptcy Pros:

  • Your eligible debts are erased, or reorganized in a way that makes them easier to pay back.
  • Bill collectors stop calling.
  • You get a clean slate to start rebuilding your credit.
  • You eliminate credit cards, giving you the chance to develop healthier spending/budgeting habits.

Bankruptcy Cons:

  • You’ll have trouble getting a new loan — even a mortgage — for at least two years.
  • You may be targeted by lenders on the prowl for recent bankruptcy filers, offering credit opportunities with sky-high interest rates.
  • Your filing will be a matter of public record. Anyone can ask to inspect it.
  • You have to qualify. You may have too much in the way of assets or income to clear the bankruptcy hurdle.
  • Your assets will be liquidated to help pay back your creditors.
  • You’ll be on the hook for a filing fee, and most likely attorney’s fees; bankruptcy is not a proceeding lay folk should tackle on their own.

How to Choose the Right Form of Debt Relief

If getting relief from debt is important, choosing the right sort of plan is crucial. And that choice hinges entirely on your particular circumstances.

If your debt is more of an annoyance than a crisis, your credit and income are in good shape, and you simply want to streamline, a consolidation loan or credit card transfer might be right for you — as long as you have the discipline not to charge your cards back up while you’re whittling away at your new loan.

However, if the mere-annoyance bird has flown, you’ve fallen behind, and things are on the brink of spinning out of control, you probably need more serious intervention. You’ve seen in the table above the benefits and drawbacks of various strategies. From these, you can decipher the beginnings of a reasonable evaluation of your options.

Then again, a second set of eyes — trained, expert, certified eyes — wouldn’t hurt. Before you commit to a course of action, do that nonprofit credit counseling thing. Call or go online to reach experts at deft-relief options.

At worst, you’ll discover you were on the right track.

At best, you’ll wind up on an unexpected path that gets you where you want to go with the least amount of pain.