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How debt relief works

Five ways to handle your debt and repay what you owe.

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Editor's choice: National Debt Relief

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  • No cancellation fees
  • Low minimum to enroll
  • No upfront fees
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Debt relief is a broad term that encompasses a wide range of products. But in general, most debt relief companies offer settlement — a way to negotiate your debt for less than you owe.

What debt relief companies do

Debt relief companies typically offer a combination of services designed to set you on a debt-free path — and keep you there. In general, most debt relief companies provide debt settlement. When you enroll in one of these programs, the debt relief company will negotiate with your creditors on your behalf, which could potentially reduce the amount you owe.

However, debt relief can also mean credit counseling services — including nonprofit ones. These help you better manage your debt, pay back your creditors and help create a budget that you can stick to.

Types of debt relief

While debt relief and debt settlement are often treated as the same thing, debt relief is a much broader category that includes debt settlement and other ways to handle your debt.

Best for when you …

Need help making a plan to get out of debt on your own and building healthy financial habits.

Have strong credit and want more favorable rates and terms, or more manageable repayments.

Can't qualify for debt consolidation on high-interest credit cards or unsecured debt.

Can't afford repayments on a debt management plan and aren't eligible for bankruptcy.

Want to find representation for bankruptcy proceedings.

Credit counseling

Credit counseling is a service offered by nonprofit agencies. These services include workshops, courses and one-on-one sessions to help you come up with a budget, manage spending and improve your credit score. You can find a credit counseling agency near you on the Department of Justice's website.

  • Watch out: Not all credit counseling agencies are legit. Make sure to sign up with a government-approved agency.

Debt consolidation

Debt consolidation involves taking out a loan or balance transfer credit card to pay off your current balances and move them into loan. It's a way to potentially lower your rates and reduce the amount you pay each month. You can find a debt consolidation loan through most personal loan providers.

  • Watch out: Some debt relief companies use this term to refer to debt management or debt settlement. Find out what exactly a company is referring to before signing any paperwork.

Debt management

With a debt management plan, a credit counseling agency negotiates with your creditors to lower your interest rates or monthly payments. You agree to begin paying off your debts through the agency with an affordable monthly payment — usually over three to five years — while the agency continues to pay your creditors on your behalf.

  • Watch out: You typically have to close your credit card accounts during the program. And missing a payment can get you kicked out.

Debt settlement or negotiation

Debt settlement or negotiation companies connect you with a specialist who negotiates with your creditors to reduce the amount you owe in exchange for a one-time payment. The agency pays off this negotiated amount, and then you repay the agency through monthly payments over three to five years.

Legitimate debt settlement companies charge a percentage of your enrolled debt as a fee — typically 20%.

  • Watch out: The majority of customers never complete debt settlement programs and can end up in an even worse situation.

Bankruptcy services

No legitimate debt relief company would attempt to steer you toward the bankruptcy process before exploring other options. But they can help you find a bankruptcy lawyer in your area if it's a viable last resort. There are some major differences between debt settlement and bankruptcy, so be sure you understand the full impact to your credit before choosing either option.

  • Watch out: Bankruptcy can stay on your credit report for up to 10 years and disqualifies you from many financial products and services.

Benefits of debt settlement

Debt settlement can be a good choice for people who have a significant amount of debt. Because debt settlement companies negotiate on your behalf, it can be easier to get your debt down to a more manageable level. You will only need to account for one payment into each month.

If your credit score is already low, settlement may not affect you significantly. And your accounts may be settled for less than you owe, saving you some money over the course of your program.

Risks of debt settlement

Debt settlement often requires you to stop paying your creditors. This will lower your credit score, put your accounts in collections and could put you at risk of a lawsuit.

There is also no guarantee that your accounts will be settled for a significant amount — and you will still have to pay fees. In general, debt settlement takes 24 to 48 months and may only reduce your debt by 20% to 30%.

See debt relief options

Compare free quotes from debt relief companies that could help you negotiate with your creditors.

Data indicated here is updated regularly

Name Product Costs Requirements
National Debt Relief
18–25% of total enrolled debt
Must have a legitimate financial hardship which is preventing the ability to pay creditors and a minimum of $7,500 in debt.
Get back on your feet with a top-rated debt relief company that works with multiple types of debt.
Freedom Debt Relief
Monthly payment based on enrolled debt, no upfront fees
Must have at least $7,500 in unsecured debt, have a hardship is preventing the ability to pay creditors, and live in a serviced state.
Freedom Debt Relief is a debt settlement company that works to help people with unmanageable, unsecured debt get back on their feet.
Accredited Debt Relief
Charges and fees vary by the company you're ultimately connected with
Must be at least 18 years old and a legal US resident; additional terms may apply based on services and products used.
This A+ BBB-rated service offers free consultations to lower your monthly payments help you get out of debt faster.
Pacific Debt
15%–25% of total debt enrolled. Fees vary by state of residence.
Reside in a state where PDI’s services are available and have $10,000+ of debt to enroll
Consolidated Credit
Fees regulated by client's state of residence, can range from$0 to $69 with an average monthly fee of $35. No upfront or contingency fees.
Debt must not be payday loans or secured loans.
This debt settlement alternative can help you find a path to financial freedom.
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Debt consolidation vs. debt settlement

Debt consolidation and debt settlement are different ways to handle your debt — and have very different impacts to your credit.

What happens to debt

Same amount consolidated into one monthly payment

Potentially lowers total debt

Cost

APR between 3.99% to 35.99%

Fees depend on amount of debt enrolled or settled

Credit requirements

Good to excellent credit required

None, but proof of hardship preferred

Credit impact

Hard credit check may temporarily lower score

Missing payments to creditors will cause a negative impact to your credit

Collateral

Unsecured and secured options available

None required

Debt relief alternatives

You don't necessarily need to sign up for debt relief services to get out of debt. You can do it on your own by paying off your debt strategically or negotiating directly with your creditors. The FTC has good tips on coping with debt, but here are some options you may also want to consider.

Use a repayment strategy

There are two popular methods to strategically pay off your debt on your own: The debt avalanche and snowball methods.

  • The avalanche method. Pay off your debts by tackling the ones with highest interest first. You could end up saving a lot of money — especially on short-term loans where interest builds up fast if you don't pay them off.
  • The snowball method. Get quick wins by clearing your smallest debts first. The advantage is that smaller loans won't get a chance to grow into bigger, unmanageable loans. But it could cost more than the avalanche method in the long run.

Negotiate your debt on your own

If you have the stomach for difficult conversations, you might want to take up negotiating your debt on your own. To do this, call your creditors and explain your situation. Tell them you can't pay your balance in the time you have and then ask for better repayment terms or even a reduction on what you owe.

Consolidate your debt

Both debt consolidation loans and balance transfer credit cards can be used to combine your current debts into one monthly payment. While this may not provide any immediate relief — you will likely be paying around the same amount each month — it will help make debt management easier.

But when you're dealing with a large amount of unsecured debt, your credit score may not be high enough to qualify for low rates. Do the math carefully to be sure a loan or credit card is actually saving you money, not adding to the amount you pay in interest each month.

File for bankruptcy

If you're unable to renegotiate your debt, you may have to declare bankruptcy. If you're going to do this, hire a lawyer to help you out with the process. And know that your credit and ability to borrow will be affected for many years.

Bottom line

With the wide variety of debt relief options out there, take the time to compare debt relief companies to find the option that works best for your finances.

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