Debt Relief: What Programs Are Available?

Got debt? Dig out with these programs and plans.

A man sits with his elbows resting on a kitchen table, which is bestrewn with papers, a calculator, and open laptop; he clutches a cup of coffee and grins slightly at the good news that debt relief is near at hand.

 Geber86 / Getty Images

Carrying a large amount of debt can be crippling. This is especially true if it is an amount that will be difficult, if not impossible, to pay off given your financial situation. But you do have options when it comes to debt relief. 

For any debt relief plan to work, whether a debt consolidation or a transfer from high interest credit cards to lower interest balance transfer credit cards, it’s important to first have a goal. After that you’ll need a clear picture of your current financial state. Then you’ll be able to choose a strategy that fits. Let’s start with the basics.

What Is Debt Relief?

Debt relief is a strategy meant to resolve or deal with a large amount of personal debt. It can also help you deal with the stressors that go along with carrying a large amount of debt. Think phone calls from creditors, worsening finances, conflicts with partners and family.

Every debt relief plan starts by getting a clear view of the debtors’ entire financial picture. That simple step—understanding the problem and beginning to see a goal—can be a significant stress reliever. In fact, taking steps to reduce the “mental accounting costs” of debt, such as through building a plan, can improve cognitive functioning and reduce stress.    

Debt relief doesn’t always mean paying off or forgiving the debt all at once. In many cases, it’s simply a strategy to restructure or reorganize the debt so the payments are more manageable. This helps the debtholder, and also satisfies the creditor, who often would rather receive a lower, negotiated payment than nothing at all.

Debt Consolidation Loans

A debt consolidation loan is a large personal loan that is granted to cover all (or most) of your other debts. It’s helpful in providing debt relief since it allows you to have one monthly payment, which can be helpful in sticking to a debt payoff plan, as well as fitting into a monthly budget. 

Examples of debt consolidation loan providers include SoFi, Marcus by Goldman Sachs, OneMain Financial, and Best Egg. A debt consolidation loan may initially cause your credit score to take a hit as you add a new loan to your credit report. However, your score will improve steadily over the coming months, provided your loan payments are made on time and you don’t add more debt. 

Before you sign on the dotted line, be sure to read up on your loan’s terms, as well as its interest rates. Debt consolidation loans’ interest rates range from 6.99% to nearly 30%. 

Balance Transfer Credit Cards 

If a large chunk of your debt is made up of credit card debt, then a balance transfer may be your answer to debt relief. A substantial amount of credit card debt usually means you’re paying quite a bit in interest, since the average credit card APR is nearly 17%. 

This is especially true if you’re only paying your card’s minimum payment. This means that a majority of your monthly payment is going toward interest rather than actually making a dent in your card’s principal balance.

Transferring your credit card debt to a low or zero APR credit card is a good way to get a jump on paying down your balances. Unfortunately, most of these offers include a fee to transfer each balance (usually a few percent of the transferred amount), and those low interest balance transfer APRs are often for a limited time. To make this work you need to pay the transferred balance before the introductory rate period ends. You should also avoid adding new debt on top of your transferred debt. 

Don’t use your balance transfer card for new purchases. Your bank gets to decide how to apply your minimum payment amount, and will usually apply that to the balances with the lowest APR—the balance on the low APR rate. After that they will apply payments to balances with the highest APRs. That means your payment may go toward new purchases rather than the transferred balance, lengthening the time it will take to eliminate the debt.    

Debt Management Plans 

A debt management plan facilitated by a nonprofit credit counselor is another option. A credit counselor will help manage and organize your finances, and help you develop a debt payoff plan if you really need one. They may help you negotiate with your creditors to get better rates or even to settle your debts for less than you owe. But be sure your counselor is from an accredited nonprofit. 

Working with a nonprofit credit counselor—even when that includes a Debt Management Plan—usually won’t affect your credit score, unless you’ve negotiated a settlement. 

Alternately, there are for-profit companies that can help you restructure or consolidate your debt. These companies collect payments from you, then once you have a certain amount, will approach your creditors and try to negotiate lower payments then. However, these companies are not always reputable. Proceed with caution. 

Filing for Bankruptcy

When considering which debt relief option is right for you, you may think that bankruptcy is your best option. After all, it will not only eliminate your debt, it will also allow you to start over with a fresh slate. Unfortunately, that isn’t always the case. 

Bankruptcy can have long-term, lasting effects on your finances, including a catastrophic effect on your credit. Bankruptcy will cause your credit score to drop dramatically and will stay on your financial record for seven years. 

There are two ways to file for personal bankruptcy, Chapter 7 and Chapter 13. Filing for Chapter 7 will eliminate all your debt, but will also liquidate your other assets. Then the proceeds will be put toward your debt. However, you are able to keep some exempt property. When you file for Chapter 13 bankruptcy, you come up with a three-to-five year payment plan, which has to be approved in a bankruptcy court.  

While it seems like an easy solution, filing bankruptcy should be your last resort when considering debt relief options.