Where to get debt relief help

High inflation and a rising rate environment have pushed many Americans to rely more on debt to keep up with household spending. This has led to increasing balances in both credit cards and unsecured loans, according to the Federal Reserve’s Q3 2023 Household debt and credit report.

If high balances keep you up at night, debt relief could be the right solution. That said, debt relief can come from multiple sources, each catering to different types of debt, credit scores and overall financial situation. Understanding how they work is key to selecting the best one for your particular needs.

Debt relief options

Debt relief is available to borrowers who have exhausted all other repayment options and are in need of a last resort. Although each method will differ, they all have the same end goal, which is to reduce — or eliminate — your existing debts.

Just like your debt, your relief option also has the potential to follow you well into the future. Whether it be the steep fees, credit damage or asset elimination, each form of relief comes with its own set of risks.

When used in the appropriate setting, debt relief can save you thousands of dollars and may even eliminate your debt entirely. To best protect your future financial health and increase your odds of success, research each option thoroughly to make a holistic and informed decision.

Getting debt relief through a debt consolidation loan

If you’re struggling with different kinds of unsecured debt, such as credit cards, personal loans and medical bills, debt consolidation may be worth exploring. Debt consolidation loans are a type of installment debt, meaning that they carry fixed interest rates and a set repayment period.

You can get a debt consolidation loan through banks, credit unions and online lenders.

When you take out a debt consolidation loan, you roll multiple debts into a single account. Depending on the lender, the new account will usually have a repayment term between one and seven years and should have a lower interest rate than what you’re currently paying between all your debts.

Unless your sole goal is to organize your payments, consolidating your loans doesn’t make sense if you’re not offered a lower interest rate. You’ll pay even more in interest by the end of your loan term. To improve your chances of scoring a lower rate, ensure your credit score is stellar and your payment history is solid.

Although many debt consolidation lenders allow you to qualify for a loan with a credit score as low as 600, you’ll need a score of at least 700 to secure the most competitive rates. That’s why this debt relief solution is best suited for those who still have their credit in good shape.

Consolidation also may be ideal for those who are overwhelmed by communication from their creditors. Just be sure that you apply with a lender that offers such a benefit, as some offer debt consolidation loans and will send  your loan balance directly to your creditors, while others will send you the money so you can do it yourself.

Getting debt relief through a balance transfer card

Just like debt consolidation loans, balance transfer credit cards allow you to combine multiple debts into a single account. However, balance transfer credit cards only allow you to consolidate credit card debt, plus you’ll need good-to-excellent credit to qualify for the 0 percent annual percentage rate (APR) introductory offer.

If you’re approved for a balance transfer credit card, the issuer will ask you to list the credit account numbers you wish to pay off and send the money directly to them. Depending on the issuer’s introductory offer, you could have   anywhere from six to 18 months to pay your balance in full, without interest.

The big caveat is that interest will start accruing if you fail to pay off your balance in full by the time the 0 percent APR introductory offer expires. Oftentimes, this rate is much higher than you’d get with a loan. Depending on your debt load, this could cause the debt cycle to continue, especially considering that the average credit card holds a rate of 20.93 percent.

Getting debt relief through debt settlement

If you have over $7,500 worth of unsecured debt and your credit is in bad shape, then seeking a program through a debt relief company may be your best option.

With a debt relief company, you can typically pay off your balances in under five years. However, this often comes tied to negative impacts on your credit, as most companies ask you to stop payments to creditors for them to be able to work with you. That is because creditors are more likely to settle your debt from less than what you owe if you’re already struggling with your monthly bill.

However, creditors are under no legal obligation to work with you or your settlement company, so you’re incurring significant credit risk by temporarily halting your payments during the negotiation period.

Additionally, most companies will charge a fee of up to 25 percent of the total amount of debts settled. If a company requires an up-front fee, you’ll want to do business elsewhere as this is a sure-fire sign of a scam. Plus, you’ll likely be required to pay account maintenance fees if your debts get settled for a smaller amount.

Getting debt relief through a debt management plan

With a debt management plan, you’ll get an initial consultation with a credit counselor, who will evaluate your credit report, current debts and income, to come up with a plan to tackle your debts in a couple of years.

Just like debt relief companies, credit counseling agencies work with your creditors to negotiate a lower payment on your behalf. You’ll typically be charged a setup fee, in addition to a monthly fee for these services.

The upside of working with a credit counseling agency is that you’ll get the tools to develop healthier money management skills to avoid ending up in a dire financial situation in the future. Likewise, credit counseling agencies don’t have a minimum credit score requirement to work with you, so it works for consumers with different credit profiles.

How to approach debt relief

There are multiple ways to go about debt relief. Follow these steps to find the right option for your needs.

Take inventory of your accounts and balances

To choose the best form of debt relief, you need to know the types of debt you have — credit card debt, personal loan, medical bills or the like — how much you owe, your current interest rate and monthly payment.

Many lenders, as well as debt relief companies and credit counseling agencies, have a minimum debt requirement for you to apply for relief. Additionally, knowing how much you owe, at what rate and the sum of all your monthly payments, will allow you to choose a debt relief plan that makes sense for your budget and help you set realistic goals.

Check your credit

Although debt relief companies and credit counseling agencies typically don’t have a minimum credit score requirement for you to apply for their servicers, lenders do. Each lender has its own credit score criteria, but you’ll typically need a score of at least 600 to qualify for a debt consolidation loan and a score of 700 and up to secure the lowest interest rates.

Many banks, credit unions and credit card companies offer free credit reports and scores as part of their services. You can also get a free annual copy of your credit report from all three major credit bureaus — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com.

Although these reports won’t show you your actual credit score, you’ll get an understanding of where you stand with creditors and what accounts need the most attention.

Choose your approach

There are three main approaches to debt relief: DIY-ing a debt management plan, using a debt relief company or enlisting the help of a credit counselor.

• DIY debt relief

  Debt consolidation is a common debt management method for those who don’t need to consult a credit counselor for assistance. This is best suited for borrowers who have a good credit score and can score a low interest rate, regardless of whether they choose a consolidation loan or a credit card.

• Debt relief company

  Debt relief companies are agencies that use a combination of tools, including counseling and debt settlement services, to help you get out of debt faster in exchange for a fee. Many require you to have at least $7,500 worth of unsecured debt to work with you. Additionally, your credit score will suffer, as you’ll typically be required to be behind on payments to be eligible for relief.

• Credit counseling agency

  Although some credit counseling agencies charge a fee in exchange for their services, these are often much lower than that of debt relief companies. Credit counseling agencies can help you get out of debt through a debt management plan and provide you with the necessary tools to understand how to better manage your finances in the future.

Gather your required documents

Once you’ve decided on a debt relief strategy, it’s time to fill out your application and gather all of the necessary documentation. Although the required documents may vary depending on the strategy you choose, you’ll typically be asked for:

• Full name and contact information.
• Physical address.
• Your Social Security number or individual taxpayer identification number.
• A copy of the most recent statement of the debts you want to restructure.
• Proof of income, such as tax returns, pay stubs and other legal documents.

These documents will help the lender, debt relief company or credit counseling agency understand your full financial picture and determine your eligibility for debt relief, as well as your options.

What about bankruptcy?

Although bankruptcy can provide some much-needed debt forgiveness, it comes with long lasting consequences that can drag down your credit score for up to 10 years.

Filing for bankruptcy could hinder your ability to secure affordable credit products in the future, as many lenders will see you as a higher risk. As such, bankruptcy should only be pursued as a last resort.

The bottom line

Debt relief can come in several forms, including debt consolidation loans, debt settlement negotiations and debt management plans. As a last resort, bankruptcy can help some borrowers — though it does not erase all types of debt, and can ding your credit score for up to 10 years. The option that will be most helpful to you depends on your personal situation, behaviors and tolerance for long-term impact on your credit.