Debt Relief Programs: The Pros and Cons of Each Type

Sarah Brady July 31, 2024

When you’re preparing to pay off debt, the number of strategies, recommendations and professional services you can choose from is dizzying. There are many “debt relief” options out there, but sorting through them and figuring out who to trust is a challenge.

That’s why the NFCC put together this handy guide. Below, we’ll walk you through the costs, credit score impact, timelines and other important considerations for each method. You can use this guide to understand the general focus and the pros and cons of each type of professional debt relief.

What is debt relief?

Debt relief is a broad term that describes any effort a debtor takes to reduce their debt, usually with the help of creditors or third parties. Debt relief can come from nonprofit or for-profit agencies, in the form of a hands-on, structured payment program or through paying an agency to manage debt accounts for you. You can also get debt relief by filing bankruptcy, which is a legal solution for paying off your debt and/or having some of your debt forgiven.

Debt settlement

Debt settlement involves negotiating with creditors to pay less than the full amount you owe. With professional, for-profit debt settlement, you pay an agency that collects monthly payments from you for as long as 48 months or more, and then uses some of the funds to attempt to negotiate settlements with your creditors and debt collectors.

Hiring a for-profit company to settle your debt is perhaps the riskiest approach to debt relief. That’s because there’s no guarantee your creditors will negotiate with them. In fact, your creditors will likely charge you late fees, increase your interest rates and report your missed payments to the credit bureaus. They may even respond by filing lawsuits against you in order to collect the debt.

Pros of debt settlement

Potential to pay less than you owe

Cons of debt settlement

No guarantee your debt will be forgiven
Debt can increase due to late fees from creditors
Interest rates on your debt can increase
Monthly fees of $40 or more
Can take 4 years or more before negotiations begin
Set-up fees and a flat fee of 15%-25% of the total amount you owe
Forgiven debt can be considered taxable income
Missed payments on debt will appear on your credit reports for 7 years
Your credit scores can drop by 100 points or more
Creditors may sue you for the debt

Debt Consolidation

Debt consolidation is the process of rolling multiple debts into a single debt. Similar to refinancing, it involves taking on a new loan or credit card in order to pay off old debts. Ideally, consolidation will get you better terms — such as lower interest rates or more affordable payments — on your debt.

You can pursue debt consolidation by opening a new credit card and using it to pay off old debt, also known as a balance transfer. If you qualify for a “balance transfer credit card,” the card might have a 0% APR promotional period where you pay no interest on the amount you transfer, however you’ll likely pay a flat fee of either 3% or 5% of the transferred debt. Alternatively, you can take out a personal loan and use it to pay off your old debt.

Pros of debt consolidation

Potential to reduce your interest charges and pay off debt faster
Can reduce your monthly payments
Consolidate multiple accounts into one
Could improve your credit scores if it accelerates your debt payoff (and if you keep old credit cards open after paying them off)

Cons of debt consolidation

You’ll have trouble qualifying for a loan or credit card if you have low credit scores
You may have to pay a balance transfer fee or a loan origination fee
Balance transfer credit cards have highly confusing rules and fee structures
Your loan amount or credit card limit might not be enough to pay off all your debt
Might encourage you to delay debt payoff or accrue more debt

Bankruptcy

Bankruptcy is a legal process that results in having some or all of your debt discharged (forgiven). There are two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is a quicker process and may involve more debt being discharged, however, you will have to pass a “means” test to qualify. With Chapter 13, you’ll have to complete a three-to-five year repayment plan, and the remainder of your debt will be forgiven after you complete the plan.

Pros

Can be the only feasible way for some people to get out of debt
Some of your debt may be forgiven
Chapter 13 payments must be affordable based on your income
Filers can benefit from the required bankruptcy counseling

Cons

Major negative impact on your credit scores
Chapter 7 remains on credit reports for 10 years and Chapter 13 remains for 7 years
You’ll have difficulty being approved for loans or credit cards for several years
You may have to forfeit some assets
Chapter 13 bankruptcy takes 3-5 years to complete
Filing involves court costs and attorney fees

Debt Management Plan (DMP)

A debt management plan (DMP) is a repayment program for your unsecured debt (mainly, credit cards). These programs are typically managed by nonprofit credit counseling organizations, some of which have NFCC-certified counselors.

If you qualify for and enroll in a DMP, you’ll send a monthly payment to the credit counseling organization for anywhere from 36 to 60 months, and the agency will distribute the payment to creditors on your behalf. Typically, your creditors will offer you lower interest rates and waive fees while you’re on a DMP.

Pros of debt management plans

Develop a plan to pay off all credit card debt
Consolidate multiple payments into one
Get free credit counseling
Possible reduction in interest rates
Possible forgiveness of creditors’ late fees
Income-based waivers are available for DMP fees
Past missed payments may be removed from your credit reports
Helps stop collection efforts from creditors
Long-term impact to credit scores is positive

Cons of debt management plans

Requires a 3-5 year commitment
You’ll likely have to pay a set up fee and a monthly fee
Loans can’t be included
You’ll have to close some of all of your credit card accounts
Initial impact to credit scores can be negative

Which debt relief method is best for you?

When you’re looking for help with debt, the options can easily get overwhelming. It’s impossible to say which method is best for everyone, but the best method for you is one that meets all of these requirements:

The relief is provided by a legitimate, nonprofit agency
The payments are affordable for your budget
Up-front fees and monthly fees are minimal
You can get the rules and terms in writing, and you understand what you’re agreeing to
You’ll be in less debt if you follow through with the plan

Out of all the methods we covered, debt settlement is least likely to meet these requirements. To choose from the other options, we recommend discussing them with one of our NFCC-certified credit counselors to see which is the best fit. While each relief method has its pros and cons, the good news is that there are several that can help you become debt free.