Debt Relief Programs & How They Work

Debt relief can help you navigate your way out of debt but be sure to know how each program works before starting down the path

Updated May 13, 2024
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American household debt stands at a record high — more than $13.51 trillion, according to the New York Fed. That’s not too surprising when you consider that wage growth is lower today than it was in 1983, according to the Atlanta Fed’s Wage Tracker.

Costs have been going up, but incomes haven’t been keeping pace.

The Federal Reserve reports that 40 percent of Americans can’t handle a $400 emergency. If you get hurt, lose your job, get divorced, or experience some other problem, debt feels like the only option. Indeed, many people fall into debt following a major life event. Even just making ends meet can result in debt for many Americans.

It’s no surprise, then, that the American Institute of CPAs reports that 56 percent of those with debt say it’s negatively impacted their lives.

If you feel like you don't know how to pay off debt and it is taking a toll on you and your life, you do have options. Here’s what you need to know about debt relief options.

What is Debt Relief and How Does It Work?

Debt relief is aimed at helping you get out of debt by arranging for some of your debt to be settled, or for your creditors to adjust the terms of your debt — usually your interest rate — so you can make more affordable payments.

There are different types of debt relief, some of which you handle on your own, and others that involve third parties that can help you navigate the process. Some types of debt relief include:

  • Credit counseling
  • Debt consolidation
  • Debt management plan
  • Debt settlement
  • Bankruptcy

For the most part, the main idea is to structure your debt in a way that allows you to get rid of it faster and at less expense than if you followed through with the terms to the very end. We’ll examine different types of debt relief below.

When You Should Consider Debt Relief

Debt relief is about helping you get on top of a situation that is starting to feel hopeless.

If you feel like you’re not making any progress in getting rid of your debt, and if creating a debt paydown plan isn’t working for you, debt relief can help.

You can arrange debt relief on your own, but many consumers feel too overwhelmed to do it by themselves. As a result, many people choose to work with a debt relief company or program. Carefully consider your situation and determine whether you can handle debt relief options on your own, or whether you need help.

How Debt Relief Impacts Credit

The way debt relief impacts your credit depends on the method you choose. Some debt relief options, like a debt consolidation loan, can actually help you improve your credit. Other types of debt relief, like bankruptcy or debt settlement, can significantly damage your credit.

Before you choose a debt relief strategy, it’s important to understand how it’s going to affect your credit in the short-term, as well as how it might impact you in the long run.

No matter what you choose, though, you can improve your credit over time when you stick with the program.

Debt Relief Programs

It’s possible to arrange your own debt relief, usually through debt consolidation loans or by negotiating different terms and payment plans with each individual creditor. However, if you’re already overwhelmed with debt, you might want help getting through the process.

What You Can Expect

When you look for a third-party debt relief program, it’s important to be aware of the red flags. There are reputable debt relief companies out there, but you’ll need to be on your toes. Here are some of the ones to watch out for when evaluating your debt relief options.

Red Flags

  • Promises to boost your credit score
  • Guarantees the removal of negative items from your credit report
  • Insists that your debt will disappear
  • High monthly fees, or a high percentage fee for the amount your debt is reduced by
  • Requires upfront payment for entrance into the program
  • Claims to be part of a “government program” aimed at helping consumers
  • Promises that it can stop lawsuits

Debt relief programs often charge monthly fees, but the fees should be reasonable. Additionally, realize that no program can remove negative marks from your credit report if they belong there. Understand, too, that the government doesn’t offer these types of programs, and that lawsuits from your creditors can happen at any time until the debt is taken care of.

Be wary of anyone making claims that they can just “fix it” for you. Debt relief just doesn’t work that way.

Credit Counseling

When you work with a credit counselor, you get help sorting through your situation and understanding your options.

What It Is

With credit counseling, you meet with a certified counselor who reviews your situation and your budget. They can help you make a plan to pay off your debt, improve your credit, and get back on track, as well as help you review other debt relief options.

Average Timeline

Your credit counselor will work with you as needed to find solutions to your issues. Making a plan with your credit counselor is likely to take less than a month — it’s the execution of the plan that takes more time. In many cases, it can take between two and five years to complete the actions provided by your credit counselor.


Depending on your situation, credit counseling has some distinct advantages, including the ability to help you save your credit score if you haven’t already run into trouble.

  • It’s often free. If you use an accredited credit counselor through a nonprofit, you might be able to get help without cost. Start with the NFCC to find accredited counselors.
  • You get help changing your habits. Working with a credit counselor won’t just help you address your debt. You’ll get help changing your financial habits so you’re more likely to stay out of debt in the future.
  • You get a thorough roadmap. Credit counselors are professionals who do this for a living. They can provide you with suggestions and a thorough roadmap designed to help you make the necessary changes. It’s step-by-step, getting rid of the guesswork.


Some credit counselors do charge fees, so be aware of that. You’re less likely to run into fees with a nonprofit counselor, but you still want to be on the watch. Here are some of the other downsides to credit counseling.

  • You’re mostly on your own. Once you get help creating a plan, you’re mostly on your own. Some programs might check in with you, but you’re mainly responsible for implementing the plan.
  • You might not hear what you want. Credit counselors are all about “tough love.” You might not like what you hear, especially if it means that it can take time to right the ship.
  • Debts might not be reduced. Credit counselors can help you develop debt negotiation tactics and help you set up payment plans, but your debts might not actually be reduced when you go through this type of program. They become more manageable, but you might still need to pay them in full.

Impact on Credit

  • Short-term: No impact
  • Long-term: No impact

With credit counseling, you might be able to salvage your credit score. If you get help early enough, before you start missing payments, you could actually maintain or even improve your credit score. By implementing a plan to reduce your debt and manage your finances, you could avoid big drops.

If you’ve already missed payments and your credit has already been impacted by your situation, credit counseling can help you slowly improve your credit. When you follow the plan laid out by your counselor, you should be able to get on track and start seeing improvements over time.

Debt Consolidation

With debt consolidation, you generally work on a way to get your debts in one place, usually through loans.

What It Is

Simply put, debt consolidation is the act of taking out one bigger loan and using it to pay off your smaller loans. Now, instead of having several payments and interest rates, you have one rate and one monthly payment. This is often easier to manage, and if you have a lower interest rate on the debt consolidation loan, you can save money on your debt.

Average Timeline

Debt consolidation loans range in length from 24 to 84 months. In general, the more you can pay each month, the better your outcome. You’ll be out of debt faster and save quite a bit in interest fees. Most debt consolidation loans are actually for between three and five years, even though you can get them for up to seven years.


For those with good credit, debt consolidation loans can be a great option for the following reasons:

  • Lower interest rates. It’s possible to consolidate debt to much lower rates, saving you money over time. There’s competition between the best debt consolidation loan companies, giving you a chance to shop around for the best terms.
  • Set payoff. You have a set payoff amount, and you know when your last payment will be. This allows you to plan ahead, and look forward to ultimate relief in time.
  • You can maintain your credit. When you use a debt consolidation loan, you can still maintain some of your other credit, including credit cards you’ve just paid off. Plus, you usually won’t take a big hit to your credit score when you get a debt consolidation loan.


One of the biggest things you have to watch out for is the ability to spend again — racking up more debt. With debt consolidation loans, it’s tempting to see money as “freed up,” but it can lead to even more problems down the road if you don’t maintain discipline and live within your means. Here are some of the other drawbacks.

  • You might not qualify. Without good credit and a stable income, you might not qualify for a debt consolidation loan. Or, if you do qualify, you might not get the best interest rate.
  • Watch out for fees. While many debt consolidation loans don’t have fees, there are some that charge origination fees. Additionally, if you use a credit card balance transfer to consolidate debt, you could end up with balance transfer fees as well as see the interest rate skyrocket at the end of the introductory period.
  • Security could be risky. It’s tempting to get a debt consolidation loan by using a home equity loan or by using your car as collateral. You might get a better rate this way. If something happens, though, your assets are at risk. If you can’t make payments later, your home or vehicle could be repossessed.

Impact on Credit

  • Short-term: Small impact in a positive or negative way
  • Long-term: Minimal

In many cases, the initial impact on your credit will be pretty small. You might lose some points because of the new debt, but, for the most part, your debt consolidation loan will result in better credit utilization, and you’ll see improvements as you make on-time payments.

The main concern with a debt consolidation loan is if you fail to make payments, or if you run up more debt on your credit cards. If these things happen, you could see a drop in your score.

Debt Management Plan

A credit counselor might suggest a debt management plan, also referred to as a DMP, which can be helpful when you want to get on track.

What It Is

With a debt management plan, a third-party manages your debt for you, usually negotiating lower interest rates and getting rid of fees. You agree to pay the remaining principal, but often other charges are removed, making it easier for you to manage your payments. You make one payment to the debt management program, and the company disburses payments to your creditors.

Average Timeline

Like many other debt relief options, the timeline is usually between three and five years. Your credit counselor can work with the debt management plan to figure out the best course of action and work out a budget that allows you to handle payments.


Your debt management plan is easier to manage, with all your debts handled in a consolidated manner. Here are some of the other advantages.

  • Improved credit score. You’re rewarded for on-time payments by watching your credit score improve as you make on-time payments.
  • You learn to better manage your money. With a debt management plan, you get help managing your money and practice good habits. When you finish, you should be in a better place to stay out of debt.
  • You pay less over time. While your debt isn’t settled, you do avoid fees and even a portion (or all) of your interest. It’s a way for you to put most of your payment toward reducing your debt, rather than getting stuck as much of it goes toward interest and fees.


There are downsides, including the fact that you might have to pay maintenance fees for the debt management plan. After all, someone is administering the plan and making payments on your behalf. Here are some other things to be aware of.

  • You could go back to square one. Once you’re in the program, you must finish. If you leave the program, all the things your creditors agreed to disappear. You could be charged interest for the time you were in the program, and you could see late fees. If you drop out, your debt could balloon.
  • No direct debt reduction. You don’t actually have your debt reduced. Only the peripheral costs are reduced.
  • No immediate relief. While your budget might be easier to handle, there isn’t immediate relief. You have to see the program through in order to be released from the debt.

Impact on Credit

  • Short-term: Medium impact in a positive or negative way
  • Long-term: Minimal

Generally, you’ll see a positive impact on your credit over time. You might see an initial drop when you enter because many creditors close accounts when you enter a debt management plan. However, the net impact should be positive over time because many of these plans use a “paid as agreed” notation if you keep up with payments.

Debt Settlement

If you actually want to see your debt reduced, debt settlement — also referred to as debt negotiation — can be an option. You might end up owing less overall.

What It Is

When you start making payments to a debt settlement company, they keep the money and it builds up, providing a way to offer a lump sum settlement to your creditors. In some cases, the debt relief company might set up monthly payments with creditors.

In either case, the theory is that you don’t deal with the creditors anymore. Instead, the debt relief company handles everything as long as you keep making your monthly payments. 

One debt settlement company we recommend is National Debt Relief due to its high customer ratings. 

Average Timeline

Most programs arrange to complete the plan in three to five years, depending on how much you can pay each month. The more you’re able to pay each month, the faster your account adds up, and the more the debt settlement company can offer your creditors.


The biggest pro is that you might end up paying less than you owe for your debts. Here are a few other benefits.

  • Experts negotiate for you. You might get a better deal with an expert in your corner, sometimes paying as little as 50% of the original debt.
  • You don’t have to do much. Beyond making your payments, there’s not a lot you have to do. You refer creditors to your debt settlement company as your representative, and for the most part, someone else takes care of the heavy lifting.
  • You have a set time for the end of the program. You know when you’ll finish, and that can provide peace of mind.


The biggest issue is that your credit score is going to suffer. You stop making payments to increase your bargaining position, so your score could tank pretty quickly.

  • It’s expensive. Debt settlement can be expensive, with fees charged as a percentage of debt resolved. There are flat-rate companies, and you could see your monthly fee take about $100 of your payment.
  • Not all creditors work with the company. Some of your creditors might not be willing to work with a debt settlement company. You might still get calls, even after entering the program. Verify which of your creditors the company has worked with before.
  • You can still be sued. Creditors can still sue you for what you owe. Until the debt is settled, you remain open to lawsuits. Additionally, creditors can still call in an attempt to collect the debt.

Impact on Credit

  • Short-term: Serious impact
  • Long-term: Slow improvement

It’s tough to hear, but your credit will be destroyed. Your accounts will go delinquent and be closed. You could see your score drop by quite a lot. However, unlike bankruptcy which can remain on your report for up to 10 years, delinquent accounts fall off after seven years from settlement. Over time, as you rebuild your finances, your score will gradually improve.


Often considered a last resort, bankruptcy can help you get a fresh start. But it comes with consequences.

What It Is

There are two types of bankruptcy. Chapter 7 is what we think of as a “fresh start.” Most of your debts are wiped away, so you can move forward. Chapter 13, on the other hand, is more common. You come up with a repayment plan to cover at least part of what you owe, so it’s not a completely fresh start.

Average Timeline

Bankruptcy proceedings can usually be completed in a matter of weeks or months. However, the consequences last much longer.


Even if you don’t get Chapter 7, you can see some solid advantages when you go through bankruptcy.

  • Protection. When you file for bankruptcy, creditors have to leave you alone. Instead, they deal with your attorney.
  • Maintain some of your assets. With bankruptcy, you usually retain your home, retirement accounts, and some of your cars. Personal items, like clothing and heirlooms, are also usually exempt.
  • You reset quickly. This is the fastest way to “reset” your finances.


Bankruptcy isn’t all sunshine and roses, though. Here’s what you need to consider before you move forward.

  • Difficulty getting credit later. With your credit score in shambles, you might not be able to get a loan for a home or car later, and it might be difficult to get a credit card. You might even have trouble renting.
  • It’s costly. You might pay quite a lot as part of a bankruptcy filing, including court fees, attorney fees, and more.
  • Not all debt can be wiped out. Student loans, back taxes, child support, and alimony probably won’t be discharged as part of a bankruptcy. If you have these obligations, they’ll still likely be in effect.

Impact on Credit

  • Short-term: Serious impact
  • Long-term: Slow improvement

It should come as no surprise, but your score will be ruined and the bankruptcy will remain on your report for up to 10 years. Over time, you can recover, and your credit will slowly recover, but it will likely be several years before you can get meaningful credit again.

What Not To Do

The worst thing you can do when debt starts to become overwhelming is to ignore the problem.

Even though debt is stressful and hard to deal with, it must be faced. If you’re brutally honest with yourself early on, you can use a debt relief solution that will be less likely to damage your credit for a long period of time.

National Debt Relief Benefits

  • No upfront fees1
  • One-on-one evaluation with a debt counseling expert
  • For people with $30,000 in unsecured debts and up

Author Details

Miranda Marquit

Miranda Marquit has covered personal finance for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.