Is a Debt Relief Program a Good Idea for You?

When your debt becomes unmanageable, a debt relief program could help you find a solution. You may benefit from debt relief 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. 

There are many ways to get help with your debt. While most people think of debt settlement when they talk about debt relief, there are other options. Each works differently to help you resolve your debt issue, and each has pros and cons.

In this guide, we’ll walk you through the techniques you can 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.

Is a Debt Relief Program a Good Idea?

Debt relief programs can work amazingly well—these programs have already helped millions of Americans eliminate unmanageable debt by reducing the amount they owe. 

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. Your credit score could also suffer, although completing your program gives you a chance to start building a better financial future. 

The upsides often outweigh the downsides—especially when you compare participating in a debt relief program to other alternatives. Let’s explore when a debt relief program is best and when other options might work for you.

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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

• 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 than a debt relief program 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 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 can walk away from your eligible debts within a few months of filing. However, you could also lose some of the things you own. For instance, you may have to turn over many of your assets to the court during bankruptcy, with the exception of a modest vehicle, some home equity, tools for your job, and certain other pieces of personal property. 

Before you can file for Chapter 7, you also must pass a means test to determine if you can afford to make a monthly payment on your debt. If you can, you won’t be eligible for Chapter 7. You’ll have to file for Chapter 13 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 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 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. 

• Bankruptcy is public.

• About half of Chapter 13 cases fail.

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

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

When a Debt Relief Program Is Better Than Debt Consolidation

Debt relief programs and debt consolidation programs are two very different approaches to dealing with debt. 

Debt relief is for someone who is struggling to fully repay their debts. 

Debt consolidation is 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 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 your consolidation loan

How debt consolidation works

Debt consolidation means 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 your monthly payment if the new loan has a lower interest rate than 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 could:

• Reduce the number of monthly payments you have to make 

• Lower your monthly payment 

• Potentially reduce interest costs over time

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 schedule the same and reduce your interest rate. That way, you benefit from lower monthly payments and some relief on your budget. Another good option: Stick with a higher payment and faster payoff.  

How to get a debt consolidation loan

To get a debt consolidation loan, you must 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 big hit. That could be enough to take you out of the running for a new loan at terms you’re happy with.

If you 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 first apply, since you're taking on new debt. Over the long run, having a new type of debt on your credit record and making on-time payments can improve your score.

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. Be sure you have a plan for avoiding this common pitfall.

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 need financial help in addition to guidance with your budget and general finances.

Credit counseling is helpful to figure out how to manage your finances, but is a source of advice rather than a method of paying off debt. 

Credit counseling could help you to stay out of financial trouble in the future as our 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, budgeting apps can do the hard work for you. 

No amount of budgeting can make a limited income cover the essentials (including debt payments) that are higher than the funds coming in. Credit counseling only works if you aren't already in financial trouble. If you can't afford your debt payments and other bills, debt relief may be more appropriate.