If you’re struggling with debt, you’re not alone—the average American has more than six figures’ worth (including mortgages and student loans). When attempting to tackle that number using a debt avalanche or snowball method on your own isn’t enough, you might start researching specific debt relief programs available that can provide assistance.
That’s great! However, each type of program has its own pros and cons that you should carefully consider, so you don’t end up digging yourself even deeper into debt. Here’s what you need to know about the pros and cons of four different debt relief options, so you can choose one that will be a good fit for you.
Debt settlement
Debt settlement programs can make a huge difference—they usually promise to negotiate with your creditors on your behalf to lower your interest rates, structure lower payments, and help you set up a payment plan that will get you out of debt over time, and while staying within your budget.
However, the Consumer Financial Protection Bureau warns that dealing with companies that provide these services can be risky, and other options should be considered as well (more on those below).
Pros of debt settlement programs:
Can potentially reduce the total amount of debt owed through negotiation with creditors
May allow you to pay off debt faster than other options
Can stop collections calls and lawsuits from creditors
Cons of debt settlement programs:
Damages your credit score, sometimes significantly
Creditors are not obligated to agree to a settlement
Debt settlement companies often charge high fees
Settled debts may be reported to the IRS as taxable income
Debt consolidation
When you’re dealing with multiple sources of outstanding debt, consolidating those debts into a single payment can seem like an attractive solution. Debt consolidation is the process of combining multiple credit card balances or other types of debt into a single new loan (or a single credit card) with a lower interest rate.
Pros of debt consolidation:
Simplifies repayment by combining multiple debts into a single, lower-interest loan
Can lower your monthly payments
Stops collections calls from individual creditors
Cons of debt consolidation:
May require you to take out a new loan, which can come with origination fees
The new loan may have a longer repayment period, meaning you’ll pay more in interest over time
Does not immediately reduce the total amount of debt owed
Bankruptcy
In general, people file for bankruptcy only as a last resort. Many assume bankruptcy is just for people who take on too much credit card debt, and while this can be true, people also file bankruptcy after suffering a major, unexpected financial blow—like a lawsuit or a catastrophic illness.
Pros of bankruptcy (what an amazing phrase):
Provides a legal path to eliminate or restructure unmanageable debt
Can stop foreclosure, garnishment, and other collections actions
May allow you to keep certain assets, like your home or car
Cons of bankruptcy:
Severely damages your credit for 7-10 years
Remains on your credit report for an extended period
Filing for bankruptcy is a matter of public record
Certain debts, like student loans, may not be dischargeable
Debt management programs
Not to be confused with a debt settlement program, a debt management plan groups several credit card debts into one payment, cuts your interest rate, and creates a 3- to 5-year repayment plan. These plans are offered by credit counseling agencies. If you’re thinking of going this route, look for an agency that’s a nonprofit and accredited by the National Foundation for Credit Counseling.
Pros of debt management programs:
Can lower interest rates and monthly payments through negotiations with creditors
Stops collections calls and lawsuits from creditors
Allows you to pay off debt in a structured, organized way
Cons of debt management programs:
Requires you to close credit card accounts, which can negatively impact your credit score
Success depends on your ability to make the agreed-upon monthly payments
Debt management companies typically charge setup and monthly fees
How to choose the right option to deal with your debt
As always, if you aren’t sure which option to choose, it will also be helpful to consult with a financial advisor or credit counseling agency to help you determine the best course of action. Whichever program you choose, the key is to act quickly and responsibly to regain control of your finances.
And before you assume you’re on the hook for a debt, it’s usually worth it to take a breath and dig in to confirm you’re actually required to pay it. Here’s a primer on how you can make ensure you’re responsible for all those debts in the first place.
