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Debt Relief: What Are the Options & How Do They Work?

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In a Nutshell

If you have debts that you’re unable to pay, there are several options that can help you to get back on your feet. These options range from filing bankruptcy to creating some sort of payment plan that prevents debts from charging off or having creditors sue you and garnish your wages. Here we will look at some avenues to help you manage your debt.

Written by the Upsolve TeamLegally reviewed by Attorney Andrea Wimmer
Updated July 28, 2023

You may be struggling to pay your bills right now. You may have lost your job due to the coronavirus pandemic or for some other reason, and now you can’t find other work. If you have debts that you’re unable to pay, there are several options that can help you to get back on your feet. These options range from filing bankruptcy to creating some sort of payment plan that prevents debts from charging off or having creditors sue you and garnish your wages. Here we will look at some avenues to help you manage your debt. 

When to Start Thinking About Debt Relief

There are many factors that may lead you to seek debt relief. Some of these reasons include: 

  • Unexpected medical bills that are too large to be repaid

  • Excessive unsecured debt with high interest rates that has gotten out of control, like personal loans and credit card balances

  • Legal fees or court costs for various types of legal penalties or other actions that require the use of a lawyer

  • Unexpected home repairs, such as for damage done by a natural disaster that insurance won’t cover

  • Unexpected major car repairs, such as for a new transmission

  • The cost of long-term care for you, a loved one, or a spouse

  • Any other type of unsecured debt that has become too large to handle

Scams and Scammers

Unfortunately, the debt relief industry is rife with corruption and bad actors that will take your money for an agreed-upon “service” and then leave you in worse shape than before. Here are several signs to look for when checking out a debt relief company: 

  • The debt relief company makes promises that sound too good to be true. If a debt relief company or debt settlement program says that they can eliminate three-quarters of your debt, then you should approach them with great caution. Debt relief companies can help you reduce your bills in many cases, but if they promise to eliminate more than half of your total debt balance, this is generally a red flag. 

  • The debt settlement company charges upfront fees. This practice can line the pockets of the debt relief or debt consolidation company, but they may simply pocket the money and leave you high and dry. It’s also now illegal, as the Federal Trade Commission banned this practice back in 2010. So, any company that wants you to pay before they reach a settlement is a scam. 

  • Any debt settlement program that tells you that it can clean up your credit report is always a scam. It’s not possible to remove accurate entries from your credit report, and anyone who claims that they can do this is lying. 

  • Any debt settlement company or debt consolidation company that uses the exact same plan for all of its customers is probably a scam. A legitimate debt relief program will create a custom plan to fit your specific needs and circumstances. It may even be able to help you deal with your secured debts or recommend you take other measures, such as opening an insured checking account in your name that you can use to pay your debts. 

  • Any debt relief company or debt consolidation company that demands your personal banking information upfront is a scam. A legitimate debt relief option will only ask for this after they have worked out a plan for you. Don’t ever give your Social Security number or bank account information to a debt relief company until after you’ve started the program. 

  • Most debt relief companies that tout themselves as a government program are fake. There are very few federal programs to help with debt relief, except for student loans, and those are generally free. So, any company claiming to be part of a government program should not be charging you a fee to sign up. 

  • Any debt settlement program that is listed on the Federal Trade Commission’s list of banned debt relief companies should be avoided. These individuals and companies have earned their place on this list by scamming unsuspecting consumers out of their money. 

Signs of a Legitimate Debt Relief Company

So now that you know what to look for in the way of scams, you should also know the characteristics of trustworthy debt relief or debt consolidation companies. Any legitimate firm will start by quoting you a reasonable amount of debt that they can eliminate for you and will not charge you any money upfront. Then they will create a specific debt reduction plan that fits your needs. They will usually require you to open a bank account to use for your payments. They will also be candid about the risks, overall cost, and impact of the debt payment plan on your credit score. 

Most legitimate debt relief companies are also nationally accredited. They will be members of either the American Fair Credit Council (AFCC) and/or the International Association of Professional Debt Arbitrators (IAPDA). Many of them are members of the Better Business Bureau as well. You can also do your own research online to see what other customers are saying about a debt relief company that you’re considering.

Debt Relief Pros and Cons

The most obvious advantage of debt relief is that it can stop all collection efforts by creditors and give you one manageable monthly debt payment with a lower interest rate than before. It can also be a real relief to not have to worry about who is calling you.

Of course, a debt relief plan will also have a negative impact on your credit score in most cases. Once you start making payments under the new plan, your credit score will most likely decrease, at least temporarily. This is because many credit card companies will close your accounts under a debt management plan, leaving you with less available credit. But your credit score will increase in the long run because your debt-to-income ratio will eventually decrease. 

Having a debt relief plan will not prevent creditors from pursuing collection efforts, like suing or obtaining judgments against you. A debt relief plan is only truly effective if all of the borrower’s creditors agree to follow the plan. 

Common Debt Relief Options

You can choose from several options when it comes to managing your debt. Credit counseling is often the place to start, but you can also do a debt management plan, take out a debt consolidation loan, declare bankruptcy, or try to settle with your creditors. 

Debt Management Plan & Credit Counseling

When your debts have gotten out of control, you should consider consulting with a qualified nonprofit credit counseling service. A good credit counseling agency can tell you whether you need to enroll in a debt management plan, take out a debt consolidation loan, or apply for another type of debt relief program. 

A consumer credit counselor may recommend you enroll in a debt management plan. With this type of plan, the debt management agency negotiates with each of your creditors to get your payments down as low as possible. Then all of your payments are rolled into one. As long as you can make your new, single monthly payment, you won’t have to worry about due dates, debt collectors, or late fees. The average debt management plan takes about four years to complete. 

As mentioned previously, most debt management plans will cause your credit score to drop for at least a short period of time. But it can also save you a lot of money over time and give you peace of mind in the meantime. This program will stop collection agencies and other associated programs from seizing your property to cover your debts. 

There really is no downside to credit counseling, as any nonprofit credit counseling agency offers the initial session free of charge. They can also provide other types of financial assistance, such as help with budgeting and going over your income versus expenses in detail. They may also find ways to help you save money on their current bills via special programs and promotions that you may not be aware of. 

Debt Relief Through Bankruptcy

A consumer credit counselor may tell you that filing bankruptcy is the most practical solution for someone in your current circumstances. If this happens, there are two types of bankruptcy most individuals choose to file: Chapter 7 and Chapter 13 bankruptcy.  

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the most severe form of bankruptcy. When someone files for Chapter 7, they eliminate most if not all of their unsecured debt without having to make any additional monthly payments. Chapter 7 will stay on your credit report for up to 10 years. But you can start rebuilding your credit score as soon as your bankruptcy discharge is granted.  

Chapter 13 Bankruptcy

Under the rules for a Chapter 13 bankruptcy, borrowers are required to follow a repayment plan based on their financial situation and approved by the court. A Chapter 13 bankruptcy is a lot like a debt management plan in that you make one single payment per month. But Chapter 13 has the added benefit of having a bankruptcy court overseeing the plan. And once the repayment plan has been completed, the remaining balance on your debt is discharged. A Chapter 13 bankruptcy is removed from the borrower’s credit report within seven years after filing. 

It should be noted that recent tax debts and child support obligations are not dischargeable in bankruptcy. But, after filing, it should be easier to make your monthly payments on these types of debt as you won’t have any other debt obligations to deal with. 

Debt Consolidation

Unlike a debt management plan, debt consolidation is usually done using a new loan that is made to the borrower, sometimes in the form of a credit card balance transfer. The borrower uses the debt consolidation loan proceeds to pay off all of their current debts, such as credit card bills. Then they repay the consolidation loan according to the terms specified in the loan agreement. 

This can give you, the borrower, a fresh start with your debts. It also helps simplify your finances since you only have to make one monthly payment. And as long as you can make your new payment, you won’t incur any more late fees or overdue notices. This helps improve your credit score and prove to lenders that you can handle your monthly payments. Debt consolidation loans can be used regardless of what type of debt you have or how much you owe. 

But if you are unable to pay this new loan off, your credit rating will be even further damaged. And many debt consolidation loans charge high interest rates and upfront fees, so borrowers need to be prepared for this when they apply. Avoid this option if you’re unable to reliably make the minimum payment every month. 

Debt Settlement

It may also make sense to settle your debts with your creditors for less than what you owe them. For example, if you owe $10,000 on your credit cards, you might be able to get the credit card companies to mark them as paid in full for a one-time payment of $6,000. But this will still count as a blemish on your credit score. While you can negotiate a settlement with your creditors on your own, some consumers enlist the help of a debt settlement company to help them.

To use this method, you’ll need to be able to pay a lump sum of cash upfront. For many people in debt, this isn’t possible. But if you only have one or two creditors and you can make lump-sum settlement payments, this may be the easiest way to become debt-free.  

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Other Debt Relief Programs

Not all debt relief programs require help from a professional credit counselor. Some types of loans have repayment options for those who fall behind in their monthly payments. If a borrower has overdue student loan payments, mortgage payments, or car payments, their lender may be able to help them directly. Communication with the lender is the key to servicing debt when this happens. 


If you’re a student loan borrower and you become unable to make your federal student loan payments, you may be able to request a deferment. A deferment allows you to stop making payments for a set time frame until you’re able to make your payments again. The lender will still charge interest, but Uncle Sam will pay the interest during the deferment period. Borrowers must qualify for a deferment. Qualifying circumstances include a period of unemployment, unexpected medical bills, or other adverse conditions that can arise. 


Forbearance is similar to deferment, except that the borrower must pay the interest that accrues on their loan balance until they can start making full monthly payments again. Their lender may have the choice to grant them forbearance in some cases, while they may be required to in others. Mandatory forbearances have a maximum duration of one year, although lenders can extend this at their discretion. 


If a borrower falls behind on their student loan or mortgage payments, they may be able to refinance their debt to improve the terms of their loan. If a borrower is behind on their monthly payments, then refinancing may allow them to escape having to make up for all of their late payments and can also head off foreclosure. If they are refinancing their home, then they may be able to do a cash-out refinance and use that money to pay off other debts, including credit card debt. 

Debt Relief With Less-Than-Ideal Strategies

When a borrower is deep in debt, it is easy to make rash decisions about what they need to do to get themselves right side up again. But this can be a big mistake in many cases, as they may not be thinking too clearly at the moment. Here are a few ways of dealing with debts that are discouraged by most financial counselors and advisors and why: 

  • Paying late on your car or mortgage payment to make your credit card payment – It’s never wise to put unsecured debt ahead of secured loans. 

  • Using retirement savings – Most financial planners tell their clients that it’s not wise to use their retirement savings to pay off their debts. They should let their retirement savings grow and find other ways to deal with their current debts because they’ll need their retirement savings in their later years when they’re too old to work anymore. Also, most types of retirement savings are exempt from attachment by creditors. 

  • Using home equity – This is only a good idea for those who are totally able to control their spending. If they can comfortably make their monthly payment after doing a cash-out refinance or taking out a home equity loan, then this may be a good idea for borrowers who have a lot of high-interest credit card balances. They can replace that debt with a home equity line of credit at a lower interest rate. The downside is that the repayment period is often much longer. 

Let’s Summarize...

There are many ways to deal with your debts. Trying to ignore them is the worst thing you can do. If you have a home loan or student loan, then deferment, forbearance, and refinancing options may all be available through your lender. If you have a lot of unsecured debt, then other methods such as debt management, debt consolidation, or debt settlement may be right for you. If not, bankruptcy may be the most responsible course of action you can take. Talk to your local consumer credit counselor for more information on debt management and which option is right for you. 

Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer


Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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