Need Debt Relief? How it Works, 3 Types & Factors You Should Know

By Sara


Last Updated: April 26, 2023


Debt can be a crippling thing to have.

It can impact your current and future financial options and cause issues in your personal life from anxiety and stress.

Debt relief is an option if you are experiencing so much debt that you can't escape it.

If you are considering debt relief, it's important to fully understand how it works, as it can be a good or bad option for you. Here are the three most common types of debt relief and what you need to know about them. 



3 Types of Debt Relief

There are three common types of debt relief: 


1. Debt Consolidation.

If you have a lot of small debts with different interest rates and payments, debt consolidation could be a good type of debt relief for you.

Debt consolidation is combining all of your debt into one single debt. This allows you to only have one loan with one interest rate and one monthly payment.

You may be able to get a lower interest rate or lower monthly payments by consolidating your loans.

One downside of debt consolidation is that you could potentially end up paying more in interest. For example, if your new consolidated loan has lower monthly payments but a longer repayment term, your new loan may end up costing you more in the long run.

You can consolidate loans for your: 

  • Personal Loans
  • Home equity loans
  • Balance-transfer credit cards


2. Debt Settlement.

If you have a large loan but have money in savings, you could potentially be able to settle your debt.

Debt settlement is when you pay a lump-sum payment toward your loan, and your debt is forgiven. This is a good way to negotiate if you are getting calls from a creditor about your loan. Most creditors can work with you to help settle your debts because any money they can receive is better for them.

If your creditor is open to a debt settlement plan, you could potentially see a 10% to 50% offer reduction on the amount you own. While debt settlement can be a great option to make a one-time payment to wipe out your debt, creditors don't have to accept this offer.

It's important to note that debt settlement will need to be paid in full, so you should only consider this if you have some type of savings or access to a large sum of cash. 


3. Bankruptcy.

When you start to feel like debt is taking over your life, and you've tried different options to take control of your debt, bankruptcy could be an option.

This is one of the more extreme debt relief options and has more caveats if you do use this as an option.

Bankruptcy allows you to have all of your unsecured debt, like credit card balances, wiped away, but you will have to use whatever assets you have toward your debt. This can include houses and family heirlooms.

While bankruptcy allows you to start with a clean slate, your credit score will be negatively impacted. 



Choosing the Right Debt Relief Option

If you are looking for debt relief, making the right choice for your specific situation is important.

However, you may also want to seek professional advice to fully understand what the right decision for you is. 

Here are three factors to consider when choosing the right debt relief option for yourself. 


1. The Types of Debt You Have.

It's important to list all your debts.

Debt relief is best used on unsecured debt like credit card balances, medical bills, and personal loans. Making a repayment plan may be a better option if your debts are secured, like a mortgage or car loan. 


2. Upfront and Ongoing Costs.

Certain upfront and ongoing costs can be associated with different debt relief plans.

For example, debt settlement will require you to pay an upfront lump sum payment. Factoring in if you can handle these upfront and ongoing costs can help you decide on a plan. 


3. Impact on your Credit Score.

Certain debt relief options can positively or negatively impact your credit score.

If you want to own a home or have a new job, be careful about a debt relief plan that will negatively impact your score. 



Final Thoughts 

If you have debt and feel like you are drowning in payments, debt relief may be a good option for you.

There are three major types of debt relief: 

  • Debt consolidation 
  • Debt Settlement 
  • Bankruptcy

It's important to take control of your finances. One of these three options may provide you with the financial relief you are looking for. However, always consult a professional before making this decision because different debt relief options can positively and negatively impact other financial aspects of your life. 

Photo by Mikhail Nilov


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