Debt Relief Programs Compared
Understanding the pros and cons to pick the best relief option for you.
Debt relief programs refer to any method of solving debt problems when repayment of the debt using traditional means is not possible. Basically, it provides a way for you to reduce or eliminate the burden of that debt so you can take action faster to regain financial control.
Of course, you have to find the right debt relief option for you needs and unique financial situation if you really want to be successful. The information below is designed to help you understand the various programs you can use to get out of debt. Remember, every situation is different, so if you’re looking for debt relief and want to make sure you’re choosing the right option, an impartial professional opinion can be extremely helpful. So if you’re facing debt problems, call Consolidated Credit today at or complete an online application to request a free debt and budget analysis from a certified credit counselor.
Defining debt relief programs
Debt relief programs are generally pretty broad and can often work on solving problems with multiple kinds of debt. However, in most cases, a relief option will only apply to one specific type of debt at a time. So for instance, consolidation can work with student loans and credit card debt, but you have to consolidate each type separately.
So here’s a basic definition of each type of debt relief program you can use and what types of debt it generally applies to:
- Deferment. With this type of debt relief, you delay or suspend the payments on a specific debt for a set period of time. Basically, you let the loan servicer know you’re having trouble meeting your payment schedule for a specific reason like unemployment, and they agree to pause the payment schedule until you can regain control and start making your regular payments again. Deferment can apply to student loans; when it comes to tax debt, deferment is simply referred to as a tax extension; with a mortgage, payment deferral is known as forbearance.
- Refinancing. This debt relief method is all about adjusting the interest rate applied to a specific debt. Often – particularly with higher interest rate loans and lines of credit – the problem people have with repayment is that finance charges eat up the majority of every payment made. So even though you pay month after month, you never seem to get anywhere. Refinancing can also save you significant money over the life of a big loan like your mortgage. You can refinance student loans, auto loans and your mortgage. If you as for a change on a credit card interest rate, it’s simply known as interest rate negotiation.
- Modification. This type of debt relief program involves changing the original terms of your loan to better suit your situation. You can modify a mortgage if it’s upside down – where the home is worth less than the remaining balance on the mortgage. Modification usually applies to loans and, in fact, mortgages are the most common type of loan that you modify. You can also modify the repayment plan on tax debt by working with the IRS to create an “installment agreement” which sets a repayment schedule you can meet.
- Consolidation. This type of relief program rolls multiple debts of the same type – like your student loans or credit cards – into a single monthly payment at the lowest interest rate possible. That means consolidation usually helps you accomplish two things: (1) you reduce the interest rates applied to your debt; (2) you simplify your payments by rolling all of your debts into one monthly payment. Consolidation usually applies to credit cards and other unsecured debts, as well as student loans.
- Settlement. This type of debt relief focuses on eliminating a debt quickly, in spite of the fact that it will likely cause credit damage. You negotiate with the creditor or loan servicer to get them to accept a portion of what you owe in order to discharge the remaining balance. So if you have a $5,000 debt, you agree to pay $3,000 and the remaining balance is discharged. That discharge almost always causes credit damage, creating a negative remark in your credit report that usually sticks around for seven years from the date of settlement. You can settle credit card debt, tax debt, and in some cases student loans.
Those are basically the five options that you have for debt relief. If none of those will work, bankruptcy is usually your best choice. The courts will discharge your debts by liquidating your assets or arranging a payment schedule for at least part of what you owe – similar to a settlement relief program, except it’s set by the courts.
Relief programs compared side by side
The following table can be helpful as you work to determine which type (or types) of debt relief that you really need:
|What does it do?||Suspend/pause payments||Reduce interest rate||Modify loan terms||Roll multiple debts into one payment||Eliminate for part of what you owe|
|Does it work for mortgages?||Yes; called forbearance||Yes||Yes||No||Called a short sale during sale of property|
|Does it work for auto loans?||Yes, although number of deferments may be limited||Yes||Possible, but rare||Yes, if you have multiple car loans out at once||During sale if you’re trading it in, but haven’t paid off loan|
|Does it work for credit cards?||No||Yes; known as interest rate negotiation||No||Yes; can also include other unsecured debts like medical||Yes|
|Does it work for student loans?||Yes||Yes; federal loan rates set by T-Note index; private set by credit score||No||Yes; federal loans can be consolidated using government programs||Usually only applies to private student loans|
|Does it work for tax debt?||Yes – file a tax extension or file for Currently Not Collectible (CNC) status||No||No||No||Yes|
|Does it cause credit damage?||As long as you start paying at end of deferment period, no||No||No||No||Yes|
|Is there a cost to do it?||No||May be fees applied; for mortgages may face additional closing costs||May be fees applied; for mortgages may face additional closing costs||Fees depend on type of consolidation plan used||Fees typically applied for every debt settled; may have to pay taxes on unpaid amount|