Debt Relief Programs: The Pros and Cons of Each Type

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When you are preparing to pay off debt, the number of strategies, tactics, and services available can be dizzying. There are many “debt relief” options out there, but sorting through them and figuring out who to trust can be difficult. That is why the NFCC published the Ultimate Debt Relief Comparison Whitepaper, which walks readers through a detailed overview of each method. It covers the costs, credit score impacts, timelines, and other important considerations in your decision. That resource can be very helpful in evaluating your options, but we thought a quick and dirty summary could also be helpful. So, in this post we’ll focus primarily on the pros and cons on each type of professional debt relief. And then if you want more information, you can check out the full whitepaper.
What is Debt Relief?
Before we get into the details, let’s clarify what we mean by debt relief. Debt relief is a broad term describing measures taken by borrowers to reduce their debt by working with creditors or other third parties. This can take multiple forms. Some forms of debt relief are formal and structured programs, while others are simply strategies that anyone can use. However, simple debt repayment strategies (like paying more than the minimum monthly payment to expedite debt repayment) do not fall under this definition.
“Debt relief,” as we are using the term here requires that the borrower work with another party. In this post, we will discuss debt settlement, largely focusing on professional settlement (working with a firm) instead of so-called “DIY settlement.” We will discuss debt consolidation, which can involve working with a consolidation company or other creditors. We will cover bankruptcy, which involves the federal court system and creditors. And, we will discuss debt management plans, which involve nonprofit credit counselors and creditors.
Debt Settlement
Debt settlement is an agreement between a borrower and a creditor stating that the creditor will consider an account to be satisfied in exchange for an amount less than the full balance. Borrowers can negotiate this on their own (“do-it-yourself,” or DIY, settlement), though there are many caveats and potential pitfalls. Borrowers with multiple debts or who do not know how to negotiate settlement on their own may consider enlisting the help of a debt settlement firm.

  • If debt settlement is successful, the borrower may have saved money by paying less than the full balance owed.


  • Debt settlement is usually unsuccessful. One major study showed that less than half of debts were settled after three years.
  • Debt settlement is expensive because of fees you must pay the settlement company, which can be between 15 and 25 percent of the enrolled debt.
  • Forgiven debt is considered taxable income, which cuts into any “savings” you might have by using this method.
  • Debt settlement encourages delinquency, which will show up on your credit report. The NFCC estimates that debt settlement causes a credit score decrease of 100 points or more in most cases.

Debt Consolidation
Debt consolidation is the process of rolling multiple debts into a single debt. It is similar to refinancing, and is often used to get better terms—such as lower interest rates—on debt. Individuals can pursue debt consolidation directly with creditors by opening a new credit card and using it to pay off old debt in what is called a balance transfer. This new balance transfer card typically has a promotional period of low or zero interest rates.
Consumers can also take out consolidation loans. These products are sometimes offered by companies that market themselves as debt consolidation firms. The loans work similarly to a balance transfer card, but may have higher interest rates.

  • Debt consolidation can be used to pay off debt with little or no interest if you have excellent credit and qualify for the best rates.
  • Debt consolidation may also provide the benefit of allowing you to make fewer monthly debt payments per month.
  • Debt consolidation may improve your credit utilization, which could help your credit score.


  • Debt consolidation is likely not a helpful strategy for individuals with lower credit scores who do not qualify for the best interest rates.
  • Balance transfers typically involve transfer fees.
  • Promotional rates expire, so debt consolidation may not be viable if you cannot pay off the debt quickly.
  • Consolidation is not accompanied by financial education resources and does not help borrowers make positive changes to their financial habits.
  • Consolidation involves opening a new account, which has a slight negative impact on your credit score. If you also leave old accounts open, you may have significant credit available, which could create problems if it causes you to spend more and overload your credit.

Bankruptcy is a legal proceeding in which an individual may have debt discharged (forgiven). There are two types: Chapter 7 and Chapter 13. Chapter 7 is quicker and may involve more debt being discharged. However, you will only qualify for Chapter 7 if you pass what is called the means test.

  • Bankruptcy may be the best solution for some people, and may actually be the only feasible way to get out of debt.
  • Both bankruptcy chapters provide for debt to be forgiven.
  • Chapter 7 is a quick process.
  • Bankruptcy involves required counseling, which provides financial education.


  • Bankruptcy has a major negative impact on your credit score. Chapter 7 bankruptcy remains on a credit report for 10 years, while Chapter 13 remains on a credit report for seven years.
  • Bankruptcy may require you to lose assets.
  • Chapter 13 bankruptcy typically takes three to five years to complete.
  • Both chapters of bankruptcy involve court costs and attorney fees.

Debt Management Plan (DMP)
A debt management plan is a structured repayment program managed by a nonprofit credit counseling organization, in which a borrower repays unsecured debt. The borrower makes one monthly payment to the credit counseling organization, and the credit counselors then distribute the payment to creditors. Typically, enrolled accounts are granted lower interest rates and waived fees.

  • A successful DMP involves paying everything you owe on the enrolled accounts.
  • You make one monthly payment; you get the benefits of consolidation without technically consolidating debts.
  • A DMP provides for lower interest rates and waived fees.
  • A DMP provides a structured plan along with counseling and educational resources.


  • Because a DMP is a structured program, it can take longer than other methods. It typically takes three to five years.
  • DMPs typically require a nominal monthly fee.

When you are looking for help getting out of debt, deciding how to move forward can be complicated. Hopefully, this overview of pros and cons has simplified the issues and guided you in the right direction.
There are some quick and simple takeaways. Debt settlement rarely works as advertised. Out of all the methods, it is the least favorable. Bankruptcy is a method of last resort, but sometimes it is the only option. On the other hand, consolidation is a good candidate for people with strong credit scores who know they can pay off the debt before promotional interest periods expire. Lastly, debt management plans work well for people with multiple unsecured debts who may not qualify for good rates with consolidation or who want the extra support that a credit counselor can provide.
At the end of the day, you have a lot to consider. To get more information on each option available, remember to check out our Ultimate Debt Relief Comparison Whitepaper.