The best debt relief options for your financial situation

There are many reasons debt can get out of control. Maybe it was an unforeseen expense, a financial hardship, a divorce or other life-altering event. Or maybe you overspent without realizing it until the bills started piling up.

Whatever the reason, you may reach a point where you can’t repay your debt without help. Debt relief programs can be that olive branch you need to pay off your debt quicker through lower interest rates, debt consolidation, waived late fees and more. 

Below, we’ll outline what debt relief is, how it can help and where you can get it.

What is debt relief?

Debt relief is finding a resolution to your debt problems by reducing interest rates, reducing the amount you owe, or taking other steps. In some cases, you can handle the entire debt relief process yourself. But some reputable debt relief companies can help streamline the process. 

In some cases, this process includes dramatically lower interest rates, which can reduce your monthly payments and save you money in the long run. Some may consist of debt consolidation or convincing your creditors to accept settlement offers for less than what you owe them. The most drastic option is bankruptcy. 

Let's review the most common debt relief options — including the pros and cons of each — to help you get a handle on which is best for you. 

What are the best debt relief options?

There are numerous debt relief options, but some of the most prevalent (and legitimate) ways to eliminate your debt include debt consolidation, debt management plans, and debt settlements.

Debt consolidation

There are several ways to consolidate your debt, and each one has its own perks and downfalls. Some of the most common include consolidation loans, lines of credit, and even balance transfer credit cards. 

Consolidation loans

Debt consolidation rolls your high-interest debts, including credit cards and other high-interest loans, into one lower-interest loan. A debt consolidation loan puts you on the path to debt relief in several ways. 

First, a debt consolidation loan usually has a significantly lower interest rate than most credit cards, reducing your monthly payment and the total amount you'll pay over time. Second, a debt consolidation loan puts you on a set payment schedule with a predetermined payoff date, so you always know how long you have until you're debt-free. Finally, a debt consolidation loan rolls all your high-interest debts into a single payment, making it easier to make the monthly payment. 

These debt consolidation loans can come from brick-and-mortar banks or debt consolidation companies that specialize in this area. 

Pros of a consolidation loan

• Reduces multiple credit card debts into one payment

• Reduced interest rates can lower monthly payments 

• You may see a near-immediate credit score boost due to paid-off credit cards

Cons of a consolidation loan

• Must have a favorable credit history and

  to get approved

• No guarantee the interest rate will be lower

• May come with steep fees that can eliminate any savings

• Monthly payments might be higher, depending on the terms

Line of credit

Another form of debt consolidation is a line of credit. It’s still a personal loan, but it’s a revolving loan you can use again and again to pay off multiple credit card debts. 

Though not a traditional form of debt consolidation, Tally offers a line of credit you can use to pay off your high-interest credit cards one by one. Plus, Tally can manage your other credit cards so you don't fall behind on those either. 

Pros of a line of credit

• Only one monthly payment

• Potentially lower monthly payments

• Tally requires only a 660 credit score

Cons of a line of credit

• Interest rates aren’t always lower than your credit cards

• You may have to use the line of credit several times to pay off all your cards

• Depending on the terms, your monthly payments could be higher

Balance transfer card

Another alternative form of debt consolidation is rolling smaller balances from high-interest credit cards onto a balance transfer card with a 0% introductory APR. While this may come with a 3%-4% balance transfer fee, you can save a lot on interest, which will lower your monthly minimum payment and help you get out of debt faster. 

Pros of using a balance transfer card

• May reduce several credit card debts into one payment

• Reduced interest rates can lower monthly payments 

• Large potential interest savings

Cons of using a balance transfer card

• May need a favorable credit history and credit score to get approved

• 3-4% upfront fee

• 0% rate is for a limited time only

• Reverts to standard credit card interest rate after promotional period

Debt management plan

A debt management plan is when you work with a credit counseling company to pay off your debts. This credit counseling company will speak with your creditors, negotiate new rates and terms and manage all your payments. So, instead of making monthly payments to each creditor, you’ll make one payment to the credit counseling company. The credit counseling company will then spread the payments to your creditors in accordance with the terms it negotiated. 

While this is a great way to manage your debt, there is a downside to the process. You must close any accounts you include in the debt management plan, which can cause a spike in your credit utilization ratio and lower your credit score. Fortunately, though, this is the only negative hit to your credit score, as a debt management plan ends with your creditors marking your accounts as paid in full, instead of the potentially harmful “settled" or "paid settled" mark.

Many credit counseling companies that offer debt management programs are nonprofit, but there are still fees associated with the service. These fees typically run $30-$50 for the initial setup of the account and $20-$75 per month. In some circumstances, you may qualify for waivers to reduce or eliminate these fees.

Keep in mind that most debt management programs can only work with unsecured debt, including credit cards and personal loans. Your mortgage and auto loan, which are secured by collateral, don't qualify. These companies also can't help you with your federal student loans.

To avoid potential scams, you can find accredited credit counseling agencies through the Justice Department or the National Foundation for Credit Counseling.

Pro of a debt management plan

• Advice from certified credit counselors 

• Waived fees and reduced interest rates

• You have one monthly payment

• Accounts included in the plan are brought current

 Cons of a debt management plan

• Setup and monthly fees

• Can only include unsecured debt

• Closed credit card accounts can drop your credit score

• Student loans don't qualify

• IRS may tax any forgiven debt as income

Debt settlement program

Debt settlement programs are two-party agreements between you and your creditor to resolve your outstanding debt. They can help reduce interest rates, fees and balances to lower your debt burden and help you pay it off more quickly. 

You can enter a debt settlement program by contacting your credit card companies and explaining you can no longer afford your payments. Credit card companies offering debt settlement programs will give you options to help you repay as much of your balance as possible. 

Once you and the credit card company have agreed on a debt settlement path, the company will set up the repayment plan and close your credit card account. Once you make the payments as agreed, the credit card issuer will forgive any remaining balance. 

It may sound easy, but there are plenty of hoops to jump through. First, not all credit card companies offer debt settlement programs, so you must call each company individually and ask. Second, this is a negotiation, so you may have to contact the credit card company multiple times to get the best offer. Finally, many credit card companies won't consider a debt settlement program until you've fallen behind on your monthly payments, which will cause damage to your credit score. 

Remember, the credit card company will close your account, which can increase your credit utilization ratio and lower your credit score. Plus, the company will close the account as "settled" or "paid settled," which can also negatively impact your credit score.

All these hoops may push you to call a debt settlement company. But the Consumer Finance Protection Board strongly advises exhausting all other debt relief options before resorting to a third party. Some issues the CFPB has with debt settlement companies include high upfront fees that negate your settlement savings, unfulfillable promises, questionable advice, exposure to potential lawsuits from creditors and more. 

There are, however, some legitimate debt settlement companies offering helpful services. Thoroughly research each company you consider. Sites like the Better Business Bureau and Trustpilot are excellent resources to evaluate a debt settlement company's reputation. 

Pros of a debt settlement program

• You can do it yourself

• Lowered interest rates and fees

• May pay less than you owe

Cons of a debt settlement program

• Multiple negative hits to your credit score

• May have to fall behind on payments to be eligible

• Many predatory debt settlement companies

• A lot of legwork if you do it yourself

• Debt negotiations with credit card companies can be challenging

• IRS may tax any forgiven debt as income

Bankruptcy

Bankruptcy is an absolute last resort for debt relief. When considering this process, there are two types to look into: Chapter 13 and Chapter 7 bankruptcy. 

Chapter 13 bankruptcy is a reorganization process where the court restructures your debt and mandates you make a minimum payment per month on your debts for a fixed period of 3-5 years. Once you complete those payments, all remaining debts are discharged, and you no longer owe them. 

Chapter 7 bankruptcy is a liquidation process where the courts sell off all nonexempt assets and uses the proceeds to pay down your debts. Once all your nonexempt assets are liquidated, the remaining debts are discharged, and you no longer owe them. 

While bankruptcy can be a relatively quick debt relief service, it has massive consequences. First, in Chapter 7 bankruptcy, you may be left with very few assets once the steps are complete. Second, you can finance nothing until after the courts discharge your debts and close the case. Finally, bankruptcy will remain on your credit report for 7-10 years, making it extremely difficult to secure credit. 

Starting the process involves reaching out to a bankruptcy attorney and having them review your finances. There are strict qualification processes for this type of debt relief, and an attorney can help determine which bankruptcy you may qualify for.

Pros of bankruptcy

• Chapter 7 bankruptcy can be relatively quick debt relief

• Strict laws eliminate guesswork

• A fresh start

Cons of bankruptcy

• Remains on your credit report for 7-10 years

• Can't finance anything until debts are discharged

• You have virtually no control of the process

• You may be left with nearly no assets

• Can't include federal student loan debt

Find the right fit to get the best debt relief

Whether you're struggling to pay your monthly minimums or can't afford to make any payments, there is a debt relief option for you. With a firm grasp on the main types of debt relief and how they can help, you can choose the one that best fits your financial situation. 

The key is to act sooner than later. Taking action now will help you avoid damaging your credit, falling victim to a lawsuit, wage garnishment or other potential penalties. With quick action, you can prevent further issues, get your debts back in line and be on your way to complete debt relief.