Takeaways
- Debt relief is a method of refinancing existing debt or reducing the debt owed.
- Debt relief agencies can pool debts together and try to get lower interest rates.
- Debt relief can protect payments over a longer term, lowering payments.
- Debt relief can allow you to structure your finances and become debt-free.
- Debt relief can come from hiring a debt relief program, debt settlement, or personal bankruptcy.
What Is Debt Relief?
Debt relief refers to strategies and programs designed to help individuals reduce, restructure, or eliminate the debt they owe. The goal is to make the debt more manageable and to provide a path toward financial stability.
Debt relief is not a one-size-fits-all solution. Some debt relief options can help consumers get back on track, while others may have serious, long-lasting consequences that should be thoroughly considered.
Read More: What Is a FICO Credit Score?
Take the Next Step:
How Debt Relief Works
Debt relief works by reducing your debt burden through intervention. The process begins with evaluating your personal finances, including total debt, income, expenses, and assets. Depending on your options, you may work with a credit counselor, negotiate directly with lenders, or hire a debt relief company.
Some programs reduce your interest rate or monthly payment, while others may allow you to pay less than the full amount owed. In extreme cases like bankruptcy, debt can be discharged entirely, although not without significant long-term effects on your credit score and financial standing.
>> Debt payments becoming too much? Read more about Debt Consolidation
When to Get Debt Relief
Debt relief is worth considering when monthly payments become unmanageable, and you fall behind despite efforts to cut expenses or increase income. Common signs that you may need debt relief include:
- Making only minimum payments on credit cards
- Using new credit to pay off old debt
- Facing calls from debt collectors
- Falling behind on mortgage or loan payments
- Experiencing financial hardship due to job loss, illness, or divorce
>> Need a credit report? Read more about the 7 Steps to Get a Free Credit Report
4 Debt Relief Options to Consider
There are several legitimate methods for managing or reducing debt. Each option has pros and cons, and the right one depends on your financial situation. Here are four viable options to consider:
1. Debt Management Plan
A debt management plan is typically offered through a nonprofit credit counseling agency. The agency works with your creditors to lower your interest rates and consolidate your payments into one monthly installment. When you use debt consolidation with an agency, you pay the agency, which then distributes it to your creditors.
This method can take three to five years to complete and may require you to close credit card accounts while enrolled.
2. Do It Yourself
If you are comfortable negotiating, try a DIY approach. Contact your creditors directly for lower interest rates, a temporary forbearance, or a revised payment plan. Many lenders will work with you if you communicate early and demonstrate a genuine need for assistance.
Get Smart With Your Money
Fresh weekly articles delivered straight to your inbox.
Enter your name and email for free tips and tricks.
3. Bankruptcy
Bankruptcy is a legal process that can eliminate or restructure your debt under federal protection. It is considered a last resort because it can severely impact your credit and remain on your credit report for up to ten years.
Chapter 7 Bankruptcy
Also known as liquidation bankruptcy, Chapter 7 allows you to discharge most unsecured debts, such as credit cards, personal loans, and medical bills.[1] In return, you may have to surrender non-exempt assets. To qualify, you must pass a means test that measures your income against your state’s median income.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows you to keep your assets while repaying a portion of your debts through a court-approved plan over three to five years. Chapter 13 is often used by individuals with a steady income who need help catching up on missed payments without losing property like a home or car.[2]
Read Also: What Is a Secured Loan?
4. Debt Settlement
Debt settlement involves negotiating with creditors to accept less than the total amount you owe—often in a lump-sum payment. This strategy is usually pursued through a debt settlement company, although you can attempt it on your own.
While debt settlement can reduce your overall debt, it comes with risks. Missed payments during negotiation can damage your credit score, and the IRS may consider forgiven debt taxable income.
Debt Relief Options to Avoid
Not all debt relief programs are created equally. Be cautious of:
- High-fee debt settlement companies that promise results but do not deliver
- “Debt elimination” scams that claim they can wipe out debt completely using legal loopholes
- Loans that require upfront fees, especially from unlicensed lenders
- Credit repair companies that promise to erase negative information from your credit report (which is often impossible or illegal)
Always research companies thoroughly to check for accreditation from agencies like the National Foundation for Credit Counseling or the Better Business Bureau.
Smart Summary
Debt relief is a broad term for strategies that help you reduce or manage your debt load. However, not all options are appropriate for everyone. Some can harm your credit or come with hidden fees and long-term consequences. Whether through a debt management plan, bankruptcy, debt settlement, or a do-it-yourself approach, the right plan can ease debt payments and pave the way to financial stability.
Smart Money requires our expert writers to rely on trusted primary sources—academic research, government reports, expert interviews, original reporting, and peer-reviewed data—to deliver precise and up-to-date content. All of our content is thoroughly fact-checked. We also incorporate relevant research from reputable publishers when it aligns with our editorial focus. For a closer look at our rigorous journalistic standards, explore our editorial guidelines.
(1) Internal Revenue Service. Chapter 7 bankruptcy – Liquidation under the bankruptcy code. Last Accessed April 23, 2025.
(2) USCourts.gov. Chapter 13 – Bankruptcy Basics. Last Accessed April 23, 2025.
