How Do Debt Relief Work?

American families with a lot of debt need help paying it off

In 2019, consumer debt hit a record high of $14 trillion, which was $2.3 trillion more than a decade earlier. The amount of mortgage debt reached a record high of $9.5 trillion, and the average balance was $202,284. From 2009 to 2019, student loan debt went up 116%, reaching a record high of $1.4 trillion, with an average debt per borrower of $35,359. In 2019, the average credit card balance for a U.S. household was $6,194. The total U.S. credit card debt reached a record high of $830 billion, up 6% from 2018.

Due to the coronavirus pandemic, there could be a lot more people struggling with debts in 2020. This could be because there will be more people without jobs and a lot of economic upheaval. If you’re one of them, you need to think about your choices and figure out what kind of debt relief you need and who will give it to you.

Debt relief companies, which are sometimes called “debt settlors,” are for-profit businesses that promise to help their clients get out of debt by negotiating with their creditors. Most of the time, they try to get lenders to take less than what they are owed by saying that the borrower might not be able to pay anything if they don’t reach a deal.

Because these businesses want to make money

they often charge high fees. If they are able to settle your debt, you will have to pay them 20% to 25% of what you owe, plus fees for their work. When you join a plan, they usually tell you to stop paying your debts and instead make monthly payments to accounts they handle. When your debts get big enough that you can make a settlement offer to your creditors, they handle the talks.

Even though the plan might work, there are some bad things about it. Most of the time, creditors will not settle. Even though the settlement company won’t charge you a fee if your creditors won’t settle, you’ll be even further behind on your payments, which will cost you more in late fees, interest, and hurt your credit score even more.

At this point, the creditors file lawsuits to get their money back or sell your accounts to debt collectors. If they do, it will hurt your credit report and cause you more trouble.

If the settlement offers are accepted and your creditors agree to partial payments, you might have tax problems. The IRS counts any amount a creditor forgives as a payment to you, which means you have to pay taxes on it.

Lastly, the process can hurt your credit score, which is very important. The credit-rating agencies are told about any payments you didn’t make while the settlement was being worked out. Since the biggest part of your credit score is how well you pay your bills, it will almost certainly go down.

Credit counselors who don’t make money, like InCharge Debt Solutions, are an alternative to for-profit companies, especially for people whose debt problems are manageable. Instead of trying to force your creditors to accept a settlement, they look at your debts and tell you what you can do to get your finances back on track. They might tell you to talk to your creditors and tell them why you can’t pay on time. Sometimes, creditors will change payment plans and lower interest rates. Most of the time, counselors who work for non-profits will customize a plan for you to deal with your debt. You send the agency money every month, and over three to five years, it will pay off your debts. Most likely, you won’t have credit cards during that time.

When to Consider Debt Relief

When other options haven’t worked, people often turn to programs that charge money to help them get out of debt. The plan could hurt your credit score and might not even work. If you think you can pay off your unsecured debt in five years or less, you might want to talk to your creditors about making a payment plan. The plan might involve putting all of your debts on one credit card with a lower interest rate and sticking to a strict budget until all of your debts are paid off.

Keep in mind that shady people often work in the for-profit debt relief business. They usually ask for a lot of money and don’t do a good job, so be careful. Some people find that the plan works, but you should make sure you know what it will cost and what will happen.

Before calling a company that helps people get out of debt, you might want to meet with a non-profit credit counselor who can help you look at your options. In some cases, you might be able to reach your goals with a low-cost debt management plan. In other cases, you might be better off filing for bankruptcy. Before moving on, you should look at all of your options.

Debt Relief Options

In general, there are four ways to get out of debt:

  • Debt management programs
  • Debt consolidation loans
  • Debt settlement
  • Bankruptcy

Which one is best for you will depend on what you’re going through.

You could, of course, choose on your own, and you might make a good choice. But even the best athletes in a sport depend on their coaches. If they need coaches to help them reach their goals, it’s likely that you do too.

When it comes to getting out of debt, the best coaches are nonprofit credit counselors like those at InCharge Debt Solutions. A certified credit counselor will give you financial advice, such as how to make a budget and how to pay off debt in a systematic way, and help you stay on track.

A credit counselor will also tell you in detail about the different types of debt relief programs and why one might be right (or bad) for you. Using his or her knowledge, he or she will then help you choose the best plan for your situation.

So, gather your income, recent pay stubs, assets, and debts, and contact a certified, non-profit credit counseling agency online or by phone with this information. You will get help.

Types of Debt Eligible for Debt Relief

Before you try to solve a debt problem, you need to know what kind of trouble you’re in. There are two kinds of debt: secured and unsecured. Most debt relief programs are geared toward helping people with unsecured debt, like credit card balances.

Unsecured loans don’t use guarantees or collateral to protect against default, but there are still consequences if you don’t pay them back. If you don’t pay, you could have your wages taken or be forced to file for bankruptcy. Your credit score would go down, which would make it hard for you to get loans at good rates in the near future.

Some common types of unsecured debts are:

  • Balances on credit cards
  • Some private student loans
  • Medical debts
  • Personal loans
  • Bills for utilities

On the other hand, the thing that was bought with the borrowed money is used as collateral for a secured debt. Mortgages are secured debts because the lender can take your house away if you don’t pay on time. Car loans are also secured because you can lose your car if you don’t make your loan payments. When you borrow money and put up something of value as collateral or get someone else to co-sign the loan, the debt is “secured.” Federally guaranteed student loans are backed by the U.S. government, which promises to pay back the lender if the borrower doesn’t pay back the loan.

Some examples of secured debt are the following:

  • Home mortgages
  • Loans and lines of credit on the value of a home
  • Car loans
  • Student loans backed by the government

Types of Debt Relief

Plans for getting out of debt should help you become debt-free in three to five years. Each has good points and bad points. That’s why it’s so important to choose the right plan for you and to get help from a professional.

Let’s talk about each one so you know what you can do when you talk to a certified credit counselor.

Debt Management Program

A third party acts as a go-between for you and your creditors in debt management programs. However, they won’t hurt your credit score in the long run.

Reliable debt management organizations negotiate lower interest rates and smaller monthly payments to make debt repayment easier and ensure full repayment

Debt Management Program Pros:

  • A single manageable monthly payment paid to your debt management business for distribution to creditors.
  • Your credit score won’t change much in the short term.
  • You will be debt-free by a certain date (usually 36 to 60 months).
  • You won’t be on your own. You will have a debt counselor who will be in charge of your plan and help you through the hard times.
  • Your interest rates will go down, and most likely, you won’t have to pay any fees.
  • You don’t go bankrupt, but you keep that option open.
  • Creditors and debt collectors need to stop bothering people.

Debt Management Program Cons:

  • You’ll have to get rid of your credit cards.
  • Because the Big Three credit-tracking agencies include access to credit in their ratings, canceling credit cards while you still owe money will lower your credit score for the first few months of the program.
  • You can do a lot of what debt management companies do on your own, like talk to your creditors, negotiate better terms, and set up a new payment plan.

Debt Consolidation Loans

Traditional debt consolidation is the only one of the Big Four that you do yourself. The process involves combining some or all of your credit card debt into a single new loan, such as a personal loan, a credit card with low or no interest, or a cash-out refinance of your home.

A debt consolidation loan could be your way out of debt if you have good credit, enough income, and the discipline to stick with it.

Pros of a Debt Consolidation Loan:

  • One payment every month. You won’t have to remember many different closing and due dates.
  • Lower the rate of interest. Average credit card rates are in the high teens. If you miss a payment, even by a few days, you could end up paying rates in the high 20s or even the low 30s. Depending on your credit score, the interest on most personal loans is a small fraction of those rates. This means you can pay off more of your debt each month.
  • Making minimum payments? You might not ever get out. You can be debt-free in 36 to 60 months if you consolidate your debt.
  • You can keep using your credit cards.

Cons of a Debt Consolidation Loan:

  • You’re getting another loan to pay back the loan you got from your credit card company.
  • Even though the rate is lower, you may end up paying more in interest because the loan is for a longer time.
  • If you’re on your own, it’s up to you to stick to a budget and stay away from temptations. If not, you could end up with more debt.

Debt Settlement

Debt settlement, which is also called debt arbitration, debt negotiation, or credit settlement, is something you can do on your own. However, most people hire a third party to try to settle their debts in a lump sum payment for a fraction of what they owe.

When you settle your debt, you stop paying your creditors. Instead, you put money into an account that you control and that grows over time. While this is going on, the debt settlement company tries to work out payment plans, interest rates, or a one-time lump sum payment that your creditor(s) will accept as “settled.”

But, and this is important, “paid in full” will not be written on your account.

You should know this about the process before you start: despite what you may have heard on the radio, you don’t have a “right” to settle unsecured debt for pennies on the dollar, no matter what you may have heard.

Debt Settlement Pros:

  • You could pay less on your debt.
  • You might not go bankrupt.
  • Creditors and debt collectors can no longer bother people.

Cons: Debt Settlement

  • Creditors don’t have to negotiate, and some of them won’t even talk to debt settlement companies. Your credit counselor will help you figure this out.
  • You could find yourself in more trouble. If you stop paying, you could have to pay late fees, pay more interest, or both.These may have to be paid.

    The IRS will tax the forgiven portion of your debt as ordinary income in the settlement year.

  • Your credit score will go down because you stopped making payments and, if the settlement goes through, because you didn’t pay off all of your debt.
  • Fees begin once the initial account is resolved.


Chapter 7 bankruptcy eliminates qualifying debts, but Chapter 13 reorganization allows you to pay them off over time.

Not everyone has to file for bankruptcy. Getting behind on your bills and having trouble making ends meet is not enough to file for bankruptcy. Instead, you must be really broke and have no obvious way to get back on your feet.

Bankruptcy Pros:

  • Qualifying debts are forgiven or restructured.
  • “Don’t call me about my bills”.
  • You get a fresh start so you can start to fix your credit.
  • You get rid of your credit cards, which gives you the chance to get better at spending and budgeting.

Cons of Bankruptcy:

  • Even a mortgage will be hard for you to get for at least two years.
  • Lenders looking for people who have recently filed for bankruptcy may come after you and offer credit with sky-high interest rates.
  • The public will be able to see what you filed. Ask to see it.
  • You have to fit the bill. You might not be able to file for bankruptcy if you have too many assets or too much income.
  • Debts will be paid by selling your assets.
  • You’ll have to pay a filing fee and, most likely, the fees of an attorney. Bankruptcy is not something that regular people should try to handle on their own.

How to Choose the Best Program to Get Out of Debt

If getting out of debt is your goal, you need to pick the right plan, which will depend on your situation.

If your debt is more of an annoyance than a crisis, your credit and income are in good shape, and you just want to simplify, a consolidation loan or credit card transfer might be right for you. Just make sure you don’t charge up your cards again while you’re paying down your new loan.

But if the “mere irritation” bird has flown, you’re falling behind, and things are about to get out of hand, you probably need more serious help. You can see the pros and cons of different strategies in the table above. From these, you can start to figure out how to evaluate your options in a reasonable way.

Still, it wouldn’t hurt to have a second set of trained, expert, certified eyes look at it. Do that thing with the non-profit credit counseling service before you decide what to do. You can talk to experts about deft-relief options by calling or going online.

At worst, you’ll find out that you were heading in the right direction.

At best, you’ll take a surprising route to your goal with minimal discomfort

We will be happy to hear your thoughts

Leave a reply