Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Personal Finance Debt Relief Is Debt Relief a Good Idea? Here’s When It Makes Sense Updated May 30, 2025 7-min read Expert Approved Expert Approved This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Ben Luthi Written by Ben Luthi Expertise: Credit cards, consumer credit, student loans, personal loans, mortgage loans, investing, banking, budgeting, debt Ben Luthi is a Salt Lake City-based freelance writer who specializes in a variety of personal finance and travel topics. He worked in banking, auto financing, insurance, and financial planning before becoming a full-time writer. Learn more about Ben Luthi Reviewed by Crystal Rau, CFP® Reviewed by Crystal Rau, CFP® Expertise: Equity compensation, oil & gas investments, education planning, investment planning, student loan planning, retirement Crystal Rau, CFP®, CRPC®, AAMS®, is a certified financial planner based out of Midland, Texas. She is the founder of Beyond Balanced Financial Planning, a fee-only registered investment advisor that helps young professionals and families balance living their ideal lives and being good stewards of their finances. Learn more about Crystal Rau, CFP® If you’re feeling overwhelmed by debt, debt relief can offer a lifeline. However, it’s important to understand how different options work, their potential drawbacks, and whether they’re the right fit for your situation. Let’s break down the common types of debt relief, when they’re worth considering, and how they might affect your credit. Table of Contents Types of debt relief Debt consolidation Pros and cons When it’s worth it How it affects your credit Debt management plan Pros and cons When it’s worth it How it affects your credit Debt settlement Pros and cons When it’s worth it How it affects your credit Bankruptcy Pros and cons When it’s worth it How it affects your credit When is debt relief a good idea? Types of debt relief There are several paths to debt relief, each with its own pros, cons, and best-use scenarios. Here’s what to know about each one. Debt consolidation Debt consolidation involves combining multiple debts into a single loan or credit line, ideally with a lower interest rate or more manageable payments. Common consolidation options include: Personal loan: A personal loan offers a fixed interest rate and fixed repayment term, giving you a clear view of your repayment plan. In many cases, interest rates can be lower compared to credit cards. (See the best debt consolidation loans.) Balance transfer credit card: Balance transfer cards offer a low or 0% introductory rate, allowing you to pay down your debt interest-free. That said, an upfront balance transfer fee typically applies, and you’ll need to pay off the balance before the promo period ends to avoid a higher rate. Home equity loan or line of credit: If you own a home, you may be able to borrow against its equity to consolidate debts. A home equity loan gives you a lump sum at a fixed rate, while a home equity line of credit (HELOC) offers a flexible credit line, often with a variable rate. Consolidation is typically my first go-to when working with clients, and we look at total interest savings versus total payment amount to figure out what works best for them. Crystal Rau , CFP® Check out the best home equity loans and best HELOCs. Pros and cons Pros May qualify for a lower interest rate. Can help you pay down debt faster. Simplifies your payments into one monthly bill. Cons You likely need good credit to qualify for favorable terms. May not help if you can’t afford the payments. Using home equity could put your property at risk. When it’s worth it Debt consolidation can be a good option for borrowers with solid credit and a steady income who want to simplify their payments and reduce interest. It may not be ideal for those with high debt levels or poor credit. How it affects your credit Applying for a consolidation loan triggers a hard inquiry, which can slightly lower your score. However, making consistent payments can improve your credit over time by lowering credit utilization and showing a positive payment history. Debt management plan A debt management plan (DMP) is a program offered by a nonprofit credit counseling agency. The agency works with creditors to negotiate lower interest rates and consolidate debts into one monthly payment. Read more: What Is Nonprofit Debt Consolidation? Pros and cons Pros Lower interest rates can save you money. A lower monthly payment can put less pressure on your budget. You won’t need to take out a new loan. Cons Credit counseling agencies typically charge setup and monthly fees. You may need to close your credit cards, which could hurt your credit. Only certain types of unsecured debt are eligible. When it’s worth it A DMP is a good choice for people with high-interest credit card debt and a steady income who need help managing payments. It’s not ideal if you have other types of debt, like medical bills or personal loans. How it affects your credit Enrolling in a DMP may require you to close credit card accounts, which can affect your credit utilization ratio and hurt your credit score until you pay them off. However, consistent payments can help rebuild your credit over time. Debt settlement Debt settlement involves negotiating with creditors to pay a reduced amount, either a lump sum or a payment plan, on what you owe. Companies like National Debt Relief—our pick for the best debt relief company—can assist with this process, though you can also negotiate directly with creditors. Pros and cons Pros Can significantly reduce your total debt. May provide faster relief compared to alternatives. Helps avoid bankruptcy. Cons Debt settlement can wreck your credit score. Debt settlement companies may charge hefty fees. You could owe taxes on the forgiven debt. Read more: Pros and Cons of Debt Relief Programs When it’s worth it Debt settlement may be worth considering if you’re behind on payments, can’t afford to pay your full balance, and don’t qualify for other relief options. How it affects your credit Debt settlement can cause significant damage to your credit score: You’ll typically stop making payments as leverage and to save up for your settlement offer. However, it may be a better long-term option than defaulting or declaring bankruptcy. Bankruptcy Bankruptcy is a legal process that helps individuals discharge or restructure their debts. There are two main types of consumer bankruptcy: Chapter 7: Also known as liquidation bankruptcy, it wipes out most unsecured debts. You may have to surrender some assets, though many basics, such as your home or car, may be exempt. Chapter 13: This type of bankruptcy reorganizes your debts into a repayment plan, typically over three to five years. After completing the plan, the remaining eligible debts are discharged. Pros and cons Pros Can give you a fresh start or an affordable repayment plan. Stops collection efforts, including wage garnishment and lawsuits. Can discharge a wide range of debts. Cons Stays on your credit reports for up to 10 years. May involve surrendering assets or following a strict repayment plan. Can affect your ability to qualify for credit in the future. When it’s worth it Bankruptcy is often a last resort for those with overwhelming debt and no realistic way to repay it. It’s not the best option if you have manageable debt or significant assets at risk. How it affects your credit Bankruptcy has a massive impact on your credit, with Chapter 7 remaining on your report for 10 years and Chapter 13 for seven years. However, it can eventually help you rebuild by clearing unsustainable debt. When is debt relief a good idea? At the end of the day, there are several factors to consider. With a traditional repayment strategy, how much extra room is in your budget to approach the debt more strategically? Can we throw extra toward the higher-interest debt and “avalanche” or “snowball” (throwing the extra toward the lowest balances) our way through the debt faster? If a client is feeling overwhelmed, whether there are too many loan payments to keep track of, or the total loan payments are eating up too much of their budget and it’s difficult to cover daily living expenses, it’s time to start looking at debt relief. Crystal Rau , CFP® Deciding whether debt relief is right for you depends on your unique financial situation. Here are several factors to consider before moving forward with a debt relief program: Credit score: Your credit score may limit your options. Some programs, like debt consolidation, require good credit for the best rates, while others may be more flexible. Budget: Consider whether you can realistically afford the monthly payments required by the program you’re considering. If you don’t already have one, creating a clear, sustainable budget is essential. Interest rates: Compare the rates you’re paying now with what you could get through debt relief. Depending on your situation, a lower interest rate could save you hundreds or even thousands of dollars over time. Fees: Make sure you understand all program costs, including upfront and ongoing fees, to determine whether the savings outweigh the expenses. Scam potential: Regardless of which option you’re considering, watch out for companies that make unrealistic promises or demand payment before providing services. Always research the reputation of any debt relief provider, and start with our vetted list of the highest-rated reputable debt relief companies. Program length: Some programs take years to complete, and with a DMP, debt settlement, or bankruptcy, failing to stick to your plan could leave you at the mercy of your creditors. In other words, be sure you’re ready to commit for the full term without risking default. Tax implications: The IRS may consider forgiven debt taxable income, so it’s important to plan for any tax liabilities that could result. Debt relief can be a powerful tool for managing unwieldy debt. Each option comes with its own benefits, drawbacks, and impact on your credit. Take time to understand your situation, compare your choices, and consider your long-term goals before committing. Whether you opt for consolidation, a debt management plan, settlement, or bankruptcy, the right path is the one that aligns with your financial situation and helps you move toward a more secure future.