What is a debt relief program and how do I know if I should use one? | Consumer Financial Protection Bureau (2024)

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What is a debt relief program and how do I know if I should use one? | Consumer Financial Protection Bureau? ›

What is a debt relief program and how do I know if I should use one? Debt relief or settlement companies are companies that say they can renegotiate, settle, or in some way change the terms of a person's debt to a creditor or debt collector. Dealing with these companies can be risky.

It typically involves hiring a debt relief company to employ one or more strategies that help you get debt under control, such as by reducing the amount you owe, lowering your interest rate, or securing better terms. Learn how debt relief programs work and whether they may be right for you.

For example, you may need credit card debt relief if you're struggling to pay off credit card bills. Or you may be interested in debt consolidation if you have several types of debt to pay off. Credit counseling, debt management plans and debt settlement also fall under the debt relief umbrella.

Debt relief refers to measures to reduce or refinance debt in order to make it easier for the borrower to repay it. Options for debt relief include forgiving a portion of the debt, lowering the interest rate, stretching payments over a longer period, or consolidating multiple debts into a single, lower-interest one.

Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.

Unfortunately, there is no such thing as a government-sponsored program for credit card debt relief. In fact, if you receive a solicitation that touts a government program to get you out of debt, you may want to think twice about working with that company.

Cons of debt settlement

Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.

National Debt Relief is the best overall debt settlement company, according to our research. National Debt Relief's low-cost fee structure and referral service make it a top option for people struggling with debts. Our highest-rated debt settlement companies all charge similar fees, ranging from 15% to 25% of the debt.

Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.

Here's a quick rundown of the costs you can expect, according to Investopedia research: Debt settlement companies: Typically 14% to 30% of your debt. Credit counseling agencies: Certain services are free, but a debt management plan typically costs from $0 to $35 to set up, with a monthly fee ranging from $0 to $75.

What happens when you do a debt relief program? ›

A debt relief program could involve: Wiping the debt out altogether in bankruptcy. Using a debt management plan to get changes in your interest rate or payment schedule. Negotiating with creditors to settle the debt for less than the full amount owed.

There is no fee. You can submit your DRO application to the Insolvency Service for free. You will need to pay the Insolvency Service a £90 one-off fee before your application is sent off. You may be able to get help with paying this.

If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.

Filing for Chapter 7 bankruptcy could discharge (forgive) all of your credit card debt. However, bankruptcy should only be considered as a last resort option due to the lasting damage it will cause to your credit. Bankruptcy will remain on your credit for up to 10 years after the filing date.

Debt relief services may have a negative impact on your credit score, but that impact may not be as big as you think — and in some cases, it can help your credit. How these services impact your credit depends on the debt relief option you choose.

You'll typically need good credit and income to take out a debt consolidation loan or balance transfer credit card, for example, while most debt settlement companies require you to enroll at least $7,500 or $10,000 of debt to qualify.

If you meet the eligibility requirements, your lender may forgive either a portion or the entirety of the outstanding balances on your unsecured debt, potentially including credit cards, personal loans or medical bills. Debt forgiveness programs and their conditions vary by the type of forgiveness you're looking for.

Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.