7 Debt Relief Options: Find the Right Solution for Your Debt

By Todd Christensen | June 7, 2022
Accredited Financial Counselor®, AFPCE

When your debt feels heavy or hard to manage, a debt relief program can help. But not all are right for everyone.

There are seven primary debt relief options to consider:

1. Self-Help Strategies

2. Debt Consolidation

3. Less Than Full Balance Programs

4. Debt Settlement

5. Debt Forgiveness

6. Government Debt Relief Programs

7. Bankruptcy

Each works differently, and each comes with its own costs, risks, and requirements. The right fit depends on the type of debt you have, how much you owe, your income, your interest rates, your credit, and how much you can realistically repay.

This guide explains how each type of debt relief works, lays out the pros and cons, and helps you figure out which options are worth a closer look for your situation.

What Is Debt Relief and How Does It Work?

Debt relief is any strategy that helps make your debt more manageable, whether by lowering your payments, reducing your interest, or resolving what you owe. It’s not one specific program—it’s a broad term that covers several different approaches.

Most debt relief solutions focus on unsecured debt, which isn’t backed by collateral. This includes:

• Credit card debt
• Medical bills
• Personal loans
• Student loans (note: these are often treated differently from other unsecured debt, and not all debt relief programs can help with them)

Secured debt is backed by something you own, which a lender can take if you stop paying. It includes:

• Mortgages
• Auto loans
• Home equity loans and HELOCs

Eligibility varies depending on the debt type and program, so confirm exactly which of your debts qualify before you enroll in anything.

How to Choose the Right Debt Relief Option

The best debt relief program for you largely depends on the circumstances of your debt.

Start by taking stock of your situation. These factors influence which options make sense:

• Type of debt: Is it mostly credit cards, medical bills, student loans, or a mix?
• Total amount owed: Larger balances may limit your options or change which ones are practical.
• Monthly budget: How much can you realistically put toward debt each month?
• Time to repay: Could you repay your debt within a few years with a workable plan?
• Interest rates: High rates make it harder for payments to reduce your balance.
• Credit situation: Some options require good credit, and some affect your credit.
• Access to credit: Some programs require you to close accounts or stop using credit cards.
• Fees: Costs vary widely between options and providers.
• Tax or credit consequences: Some options can create a tax bill or lower your credit score.
• Need for guidance: Would a professional’s view of the full picture help? Consider talking to a nonprofit credit counselor about your options.

No single factor tells you which program you need—it’s the combination that helps guide your direction.

If your debt-to-income ratio is part of what’s weighing on you, learning how to fix your debt-to-income ratio is a good place to start.

Compare the 7 Types of Debt Relief

Get a quick look at how the seven debt relief options compare, then find more details below on how each works, who they may suit, and what you need to know. 

1. Self-Help Debt Relief

Self-help debt relief means tackling debt on your own using:

• Budgeting
• Professional counseling
• Direct conversations with creditors

If you believe you could repay your unsecured debt within about five years, it’s often a sensible place to start.

Budgeting

Start by writing down your monthly income from every source, your fixed expenses (rent, car payments, insurance premiums), and your variable expenses (groceries, dining out, entertainment).

Total each column and look for places to cut. Even small changes add up. Skipping a $2.70 daily coffee frees up roughly $80 per month, or nearly $1,000 per year to put toward debt.

Credit Counseling

Credit counseling is a confidential session with a trained professional who reviews your income, expenses, and debts. In a typical session, you can expect to:

• Go over your full financial picture
• Build or adjust a realistic budget
• Learn about money management and how to stay out of debt
• Hear which debt relief options may fit your situation

Nonprofit organizations typically offer low-cost or free credit counseling, but always verify fees upfront.

Credit counseling is not the same as credit repair. Credit repair clinics often make promises they can’t keep, and no credit repair organization can remove accurate negative information from your credit report. You can dispute inaccurate information yourself for free.

Direct Negotiation with Your Creditors

Some creditors may be willing to set up a modified payment plan if you reach out and explain your situation. Reach out early, before accounts go to collections, when creditors are typically more flexible.

Pros and Cons of Self-Help Debt Relief

2. Debt Consolidation

Debt consolidation means combining multiple debts into one monthly payment, ideally with a lower interest rate. The term describes several different approaches, so if you ask different companies about debt consolidation, you may get very different answers.

There are three main types of debt consolidation: a balance transfer credit card, a debt consolidation loan, and a debt management plan.

Balance Transfer Credit Card

A balance transfer card lets you move credit card debt onto a new card with a 0% introductory APR for a set period. If you pay off the balance before the promotional period ends, you can avoid interest on it.

Approval typically requires good or excellent credit, and transfer fees are common, so read the terms carefully. Keep in mind that any balance left when the promotion ends is charged the regular, often higher, rate.

Debt Consolidation Loan

A debt consolidation loan is a new loan used to pay off existing debt, leaving you with one payment. It can cover several types of unsecured debt, not just credit cards. Borrowers with fair or bad credit may still qualify, though better credit typically means better rates.

Before you commit, confirm that the new rate is lower than the rates on the debts you’re paying off. Watch for origination fees, which are commonly a percentage of the total loan amount. Be cautious with longer terms, which can lower payments but accrue more interest over time.

Debt Management Plan

A debt management plan (DMP) is a repayment program typically offered through a nonprofit organization. It isn’t a loan, so your credit score isn’t a factor in qualifying for this debt relief option.

A credit counselor reviews your finances and helps you develop a budget. The organization then negotiates with your creditors on your behalf, aiming for lower interest rates or waived fees, though this is not guaranteed. Once creditors agree, you make one monthly payment to the organization, which distributes funds to your creditors.

Most DMPs aim to have your debt paid off within 3–5 years. Key information includes:

• Fees: Expect a one-time setup fee, which varies by state, as well as a monthly service fee. Your credit counselor can show you the projected savings versus the costs of the program.
• Credit considerations: A DMP may be noted on your credit report, but the plan itself does not impact your credit score. Most plans require you to close or stop using most credit cards, and closing accounts can affect your score.
• Consistent participation: Payments must be consistent and on time. Missing payments can lead creditors to withdraw concessions or the agency to remove you from its program. If your plans change, understand the implications of paying off a debt management plan early.

Should you decide that a DMP is a good option for you, choose an agency accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.

Learn more about our debt management programs.

Pros and Cons of Debt Consolidation

3. Less Than Full Balance

A less than full balance (LTFB) program is a nonprofit-facilitated arrangement in which creditors may agree to accept less than the full amount owed to resolve a debt. The nonprofit organization works with participating creditors, and you make payments—typically through the organization—toward the reduced amount.

While LTFB may sound similar to debt settlement, there are some important differences:

• Traditional debt settlement is run by for-profit companies that negotiate with each creditor case by case, usually after you’ve stopped paying.
• LTFB programs are administered by nonprofits, often work with creditors they have established agreements with, and are structured so you keep making payments rather than falling behind.

Choosing a nonprofit agency for an LTFB program means you are working with an organization that is focused on helping individuals improve their financial well-being. Nonprofit agencies also often provide additional resources, such as financial education and budgeting assistance, to support you in your journey toward financial stability.

Pros and Cons of Less Than Full Balance

4. Debt Settlement

Debt settlement is a process in which a company negotiates with your creditors to settle your debts for less than what you owe. It is not a form of debt consolidation—it doesn’t combine your debts into one payment.

Debt settlement has risks. Many settlement companies advise you to stop paying your creditors and save money in a separate account while they negotiate, then use those funds to pay any settlements. Negotiations can take months to years, and creditors are not required to agree to settle.

The Consumer Financial Protection Bureau strongly cautions against debt settlement programs.

Warning Signs of a Questionable Company

As you explore debt settlement, avoid companies that do the following:

• Charge fees prior to successfully settling your debts (this is expressly prohibited under the FTC’s advance fees ban)
• Guarantee that they can settle all of your debts
• Claim to have a “new government program” for credit card debt
• Don’t explain the consequences of stopping payment to your creditors
• Promise to stop all collections calls and lawsuits

Before you decide on debt settlement, we suggest exploring every other option first.

Pros and Cons of Debt Settlement

5. Debt Forgiveness

Debt forgiveness happens when a creditor agrees to cancel some or all of the debt you owe. Whether this debt relief option is available depends heavily on the creditor, the type of debt, and the specific program, and it’s never guaranteed.

Debt forgiveness may be achieved by reaching out to creditors directly to ask whether they offer hardship programs, or it may result from a debt settlement agreement. Forgiven debt may be taxable, so check with a tax professional.

Two types of debt come up most often when people ask about forgiveness:

• Medical debt, where assistance is more common
• Mortgage debt, where it’s rare

Medical Debt Forgiveness

If medical bills are unmanageable, you can contact the hospital and ask about its financial assistance policy. Depending on your income, the hospital may offer a payment plan or reduce part of the bill. In other cases, it may choose to forgive part of the debt.

Reach out early, since it’s usually easier to work with a hospital directly than after a bill goes to collections, and be ready to share financial documents.

Learn more about our free medical debt counseling services.

Mortgage Debt Forgiveness

Because your home is collateral, lenders rarely forgive mortgage debt. However, if you’re struggling to pay, some lenders offer options such as loan modifications or forbearance.

Read the terms carefully. If a modification lowers your payment by extending the loan term, you may pay more interest over time. A HUD-approved housing counselor can help you understand your options.

Pros and Cons of Debt Forgiveness

6. Government Debt Relief Programs

There is no single government program that eliminates consumer debt. Existing programs are targeted toward and mostly involve student loans and tax debt, along with legal protections for active-duty servicemembers. Note that government programs change often, with shifting requirements and terms.

Student Loans

Federal student loan relief depends on your loan type and situation. Federal loans can qualify for forgiveness, cancellation, or discharge in certain cases, including:

• Public Service Loan Forgiveness Program (PSLF) if you have worked full-time for qualifying government or nonprofit employers
• Teacher Loan Forgiveness if you have been a full-time teacher for five consecutive years at qualifying low-income schools
• Closed school discharge and total and permanent disability discharge for borrowers who meet specific criteria
• Income-driven repayment (IDR) that ties monthly payments to income, with forgiveness possible after a set period

Student loan scams are common. Always do your research before applying for student loan forgiveness.

Find more information on student loan forgiveness here.

Tax Debt Relief

If you owe back taxes, the IRS offers installment agreements, which spread what you owe into monthly payments, and offers in compromise, which may let you settle for less than the full amount. The IRS accepts an offer in compromise only if it determines you can’t reasonably pay in full, so the requirements are strict.

Active-Duty Military Debt Relief

The Servicemembers Civil Relief Act (SCRA) gives active-duty servicemembers certain protections, including possible reduced interest rates on debts taken on before service and safeguards related to eviction and foreclosure. Your local Armed Forces Legal Assistance office can tell you if you qualify.

Are There Government Credit Card Debt Relief Programs?

Currently, there are no government programs that assist with credit card debt. If you are looking for help with credit card debt, you will need to seek out a private organization.

Pros and Cons of Government Debt Relief Programs

7. Bankruptcy

Bankruptcy is a legal process handled through federal court that can eliminate or restructure debt. It’s generally considered a last resort because of its long-term effects on credit. If you can’t realistically repay your debts within about five years, it may be worth discussing with a qualified attorney.

Not all debt is cleared by bankruptcy, including debts paid to—or through—the government, such as:

• Student loans
• Child support
• Taxes

Some rare exceptions exist. A judge may also determine that credit card debt will still need to be paid through a payment plan or settlement.

There are two main chapters of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 is sometimes called liquidation bankruptcy. A trustee may sell certain nonexempt assets to pay creditors, and remaining eligible debts are discharged.

There’s no repayment plan. Eligibility depends on income and other factors, and some property is protected by exemptions that vary by state.

Chapter 13 Bankruptcy

Chapter 13 is also called a wage earner’s plan. You keep your property and follow a court-approved plan to repay creditors within 3–5 years. Remaining eligible debts may be discharged after you complete it.

Potential Consequences of Bankruptcy

Bankruptcy is one of the most serious negative marks on a credit report. A Chapter 7 can stay on your report for up to 10 years, and a Chapter 13 for up to 7. Borrowing, renting, and getting new credit may be harder in the meantime.

Additionally, the cost of retaining an attorney for bankruptcy filings can amount to thousands of dollars, depending on the complexity of your case.

Pros and Cons of Bankruptcy

Which Debt Relief Option Is Right for You?

There is no universally “best” debt relief program. The right option for you depends on the factors covered above: your type of debt, how much you owe, what you can afford monthly, your credit, and your goals. Before you sign up for any program, consider:

• Qualifications: What do I need to qualify for the program?
• Fees: What will I pay, and when?
• Timeline: How long will the program last?
• Creditors: Which creditors will be paid, and how much?
• Savings: How can I realistically save by using the service?
• Taxes and credit: What are the financial implications of the program, now and later?
• Reputation: How long has the company been in business? How often are programs successful, and what do other customers say?

A good debt relief company will be transparent about its programs, answer all your questions, and provide free information about its services. Remember that some programs that work well for one person may not be right for another. Being fully informed before entering any program can protect you from risking your financial health.

Ready to talk through your options? Learn more about Debt Reduction Services or reach out to speak with a nonprofit credit counselor.

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