Loans > Debt Relief

Debt Relief

This guide explains what debt relief is, how it works, and what your options are.

Reviewed by
Updated January 10, 2022

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

Are you in debt? You’re not alone — personal debt totals nearly $14 trillion in the United States.

Managing your debt can be time-consuming and draining. Even worse, many people eventually discover that they won’t be able to pay off their debt in the near future, whether due to unavoidable financial hardships or because of poor debt payment strategies.

The stress of wondering how low your credit score will sink, or how long you’ll have to deal with debt collectors harassing you, can totally ruin your day-to-day and long-term financial planning.

Luckily, there is a viable solution 😌: Debt relief.

Through debt relief, you may be able to knock off some of your debt or negotiate new payment terms that meet your current financial abilities. Let’s break down what debt relief is and some of the top strategies you can pursue.

What is Debt Relief?

Debt Relief

“Debt relief” is an umbrella term that refers to any strategy, service, or plan an indebted person uses to obtain some measure of financial respite. Debt relief can either result in all the debts of a person being wiped out (or forgiven), or only result in partial debt forgiveness depending on the program or strategy used.

Debt relief manifests in a variety of systems and plans, so there is no singular debt relief strategy that works perfectly for everyone. The unifying feature is that it results in an individual not having to pay their full owed amount, or at least results in them being able to pay their debt on a more manageable timescale.

Is Debt Relief Right for You?

Many indebted individuals utilize one form or another of debt relief in order to handle their remaining debts more capably, to achieve some member of financial independence, or to improve their credit score more rapidly. Debt relief may also be important if someone comes into a period of dire financial need and can’t afford the same level of debt payments when leveraged against the costs for survival (i.e. food and shelter).

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How Does Debt Relief Work?

Debt relief works differently depending on the relief strategy you plan to employ. Furthermore, debt relief works differently for companies and individuals, mostly because there are different levels and types of debt common between either entity type. However, debt relief can be extended or utilized by both companies and individuals, and even sovereign nations have been known to employ debt relief programs or strategies from time to time.

There are tons of debt relief strategies that we’ll go over, including:

  • debt consolidation
  • debt relief services 
  • budget management programs
  • and more

Many debt relief strategies involve speaking directly to creditors or debt collectors while others will be more focused on what the indebted party can directly do.

Why is Debt Relief Important?

Debt relief is important as an option because it allows you (or any other indebted person) to handle your debts and provides several alternatives to just paying off designated amounts at scheduled times more capably. Debt relief can also be important if you want to avoid bankruptcy, although bankruptcy is still a viable option in some cases (more on that below).

💡 Did you know? Debt relief can improve your credit score, which can increase your eligibility for a top low interest personal loan.

Types of Debt Relief

Let’s break down the most common types of debt relief.

Rigid Budgeting & Budget Management Plans

The first type of debt relief strategy focuses on what you can do as an individual and requires an in-depth examination of your spending habits and income levels. Coming up with a rigid budgeting plan may be difficult or relatively easy depending on your self-control or personal situation.

For instance, it’s a lot easier for someone with a relatively stable income to look at their monthly budget and trim down the “fat”, so to speak, by eliminating any excessive costs or spending habits. But this strategy is a lot more difficult if you don’t have a consistent income or if your spending isn’t trimmable at the moment (for instance, maybe you have lots of unavoidable costs, like if you have kids).

Regardless, a budget management plan or budgeting your spending more rigidly will, in theory, result in you having more money to pay toward your creditors or outstanding debts. To budget more rigidly:

  • open up all your banking accounts and look through your spending habits over the last three months
  • write down all the information you discover with a paper and pencil
  • identify any spending that is not for necessary items or bills (i.e. food and house heating)
  • next, tally up all of your income and boil it down to a single number. Only include guaranteed income in order to avoid over budgeting
  • if your spending is higher than your income level, take a hard look at any unnecessary items or bills that you currently pay for but which you might be able to eliminate
  • project how much money you would save by eliminating all excessive or unnecessary spending. If that number brings your income higher than your spending, now you see how you much should start spending and saving money over the next three months
  • any extraneous money that you save should go toward paying your debts or into a savings account. Over time, you’ll eliminate your excess debts and build up a solid nest egg to boot

This is all relatively simple and it’s something that most people are taught at one point or another. However, in the digital era, many of us begin subscribing to streaming services or other, nearly invisible recurring expenses and may accidentally spend more than we intended. Taking an in-depth look at your bank account at least once a month is always advisable to avoid being surprised by how much money drains away each pay period.

🙌 How it helps:

  • Reinforces good debt management skills
  • Doesn’t rely on taking out another line of credit
  • Can be done with rudimentary math skills
  • Easy to start and maintain with consistent income

⚠️ Risks:

  • Doesn’t eliminate any debt right away
  • Vulnerable to poor debt/money management skills

Mortgage and Loan Refinancing

Another common debt relief strategy involves refinancing your mortgage or any other large loan (i.e. a car loan). In a nutshell, even the top mortgage lenders can result in a need to refinance. The process involves calling up your lending company or mortgage provider and renegotiating your mortgage or loan settlement.

Many people are a little hesitant at employing this strategy – after all, it feels awkward and a little vulnerable to call up your lender and admit that you can’t make the same monthly payments, at least for the foreseeable future. But one thing to remember is that your lender doesn’t want to get debt collectors involved; they just want everything to eventually be paid.

In a lot of cases, mortgage providers or lenders will be more than willing to work with you and renegotiate your settlement, especially if you’ve paid your bills on time thus far. Be honest and open about how much you can pay and try to work toward a new mortgage agreement.

You can also usually get mortgage providers or lenders to agree to a temporary refinancing strategy. For instance, if you’re in between jobs and don’t want to blow through your savings in a few months, many lenders might agree to a smaller monthly payment in exchange for making up the remaining amount once you have a steady income again.

All this can help you avoid having to take on another line of credit or worsening your credit score.

🙌 How it helps:

  • Can let you renegotiate for better interest rate or payment term
  • Easy to do if you have good credit/payment history
  • Doesn’t involve opening more credit lines

⚠️ Risks:

  • Depends on the lender’s attitude
  • Doesn’t eliminate any debt immediately

Debt Consolidation Loans

Technically, even the top debt consolidation loans aren’t a form of debt relief – they don’t result in you paying less money over time (except perhaps in interest). Instead, they’re a useful tool to bring all of your debt payments into a single payment each month, which can result in a lower monthly interest rate and mean a more manageable time paying off your debt(s). You do still have to pay your debt in full eventually.

Do you have bad credit? There are still a number of debt consolidation loans for bad credit that could help.

Still, debt consolidation loans can be incredibly useful, especially for those who have multiple lines of credit open and who must make multiple debt payments every month. Consider a situation where you have three or four credit cards open and have to pay a minimum monthly fee every 30 days.

Each of these lines of credit also comes with its own interest rate, meaning that each credit card racks up more debt over time. In the end though, learning how debt consolidation works is key.

A debt consolidation loan, which can be obtained through a debt consolidation loan provider, will involve a third-party company stepping in and giving you a lump sum that you can use to pay off your multiple other debts. In exchange, you pay back this new loan to the debt consolidation lender. This loan comes with a new (and hopefully more manageable) interest rate and a new payment period.

The resulting arrangement means you’ll pay off your original amount of debt, but over a period of 3 to 5 years in many cases and with a lower monthly interest rate. It’s a lot easier to handle and may be a great option if you have trouble juggling or keeping track of multiple credit payments every month.

🙌 How it helps:

  • Makes managing multiple payments easier
  • Improves interest rate payments
  • Can boost credit score by closing extraneous lines of credit

⚠️ Risks:

  • Doesn’t eliminate any debt immediately
  • Dependent on having good debt repayment habits

Debt Settlement Programs

Debt settlement programs are offered by for-profit companies that step between you and your creditors. They’ll negotiate with your various creditors and, in theory, will eventually work out a deal so you can pay a lump sum or settlement that is ultimately less than the full debt you owe.

The idea is that your creditors are happier with a lump sum now than they are with struggling to get you to pay the full amount you owe in piecemeal payments over a longer period.

To do this, debt settlement companies will usually ask you to set aside a specific amount every month in order to build up to the lump sum payment. That money will go in an escrow account held by the third-party debt settlement company to ensure that you adhere to the agreement.

There are some potential downsides with this debt settlement strategy, however. For one, many debt settlement companies will ask you to stop paying your creditors, ostensibly so you can save the money for the lump sum. However, because saving this amount of money could take up to several years, your credit score will steadily decrease simply because the creditors will continually report your lack of payments to the big credit bureaus.

Furthermore, many debt settlement companies will not negotiate your big debts until all your smaller debts are settled. Interest continues to accumulate, and this can be particularly problematic with larger debts with bad interest rates.

Lastly, debt settlement companies will require you to set aside money for between one and three years on average. Many people who are already in debt can’t manage this level of saving consistency, often because of factors beyond their control (for instance, not having a steady job or having multiple life disasters occur, one after the other). This can make all the debt settlement efforts moot in the end.

Is It Better to Settle a Debt or Pay in Full?

It depends on your situation, and it can be a tough judgment call to make. It’s almost always better to pay your debts in full if you can at all manage it. Debt settlement remains a last-ditch debt relief option if you absolutely can’t pay your debts in full and creditors are calling you all the time.

We’d recommend that you always take a hard look at any debt settlement company before signing up for one of their programs, however. Debt settlement programs are rife with scammers or shady companies, especially because these types of organizations tend to prey on people who aren’t very financially knowledgeable or those who are already desperate.

🙌 How it helps:

  • Can eliminate some debt immediately

⚠️ Risks:

  • The industry is rife with scammers
  • Can hurt credit score
  • Larger debts may go ignored for a long time

Debt Forgiveness

Another potential pathway to debt relief involves debt forgiveness. Forgiveness, in this case, is quite literal; you’ll call your lender(s) and explain your financial situation, then ask if they’re willing to forgive some or all of your debt.

In most cases, lenders will not forgive all of your debt, no matter how dire your financial straits are. This is simply a reality of the financial lending business – after all, if lenders frequently forgave all the debt that people owed them, many people wouldn’t make payments in the first place!

However, debt collectors and lenders are still people and aren’t totally lacking in empathy. Depending on your credit payment history, they may extend some grace to your situation and be willing to forgive some (or even a majority) of your outstanding debts in exchange for a lump sum or a smaller payment to be paid in installments.

Does Debt Forgiveness Really Work?

This isn’t a one-size-fits-all debt relief solution, of course, since it heavily depends on the graciousness of your lender(s). Some lenders will be more willing to forgive some amount of your debt while others may have more ironclad debt forgiveness refusal policies.

The specifics of your debt forgiveness agreement will also vary dramatically from case to case. Some lenders may demand that you pay two-thirds of your total debt in a lump sum if you want them to forgive the last third. This may not be possible for everyone, and especially for those who are already in monetary trouble.

Other debt forgiveness agreements might involve you paying off half the debt in larger payments over the next 12 months. As with debt settlement, debt forgiveness works mostly because the majority of lending companies would rather have some of the debt repaid soon than less of it paid later.

🙌 How it helps:

  • Pays off some debt immediately
  • Can be done with lenders and debt collectors
  • May be viable with good credit/payment history

⚠️ Risks:

  • May still have to pay taxes on forgiven debt
  • Dependent on lender’s attitude

Debt forgiveness is easier to seek out if you have a good credit score or a solid relationship with a financial institution. It’s a lot tougher if you lack both of those things. However, in some cases, you can reach out to a third-party company that may be able to advocate on your behalf. This leads us to the next debt relief strategy…

Nonprofit Help and Credit Counseling

There are tons of nonprofit or credit counseling organizations that are designed to help people seek out debt relief, either by acting as third-party advocates or by helping individuals come up with excellent debt management strategies. Let’s take a look at the first form of help.

Some nonprofit organizations may be willing to contact your debt collectors or creditors in an attempt to get them off your back. In some situations, they may be able to negotiate a better interest rate or payment term for your outstanding debts, although it’s wise never to count on this possibility as a guaranteed outcome.

Still, these efforts can be helpful if you struggle to speak with debt collectors yourself or if you’ve already tried speaking with them and they’re aggressive or incessant.

More commonly, you can use credit counseling services in order to get professional advice on how to manage your various debts. Credit counseling services are usually offered through nonprofit organizations or as parts of other financial institutions. You may even be able to find some credit counseling services through the institution to which you owe debt in the first place!

Credit counselors are normally certified and highly trained in money and debt management, budget strategies, and consumer credit practices. They’ll be able to discuss your budget and overall financial situation and help you develop an excellent plan to pay back your debts over time with your existing income.

Of course, this doesn’t at all guarantee that you’ll actually find debt relief or be able to work on the counseled plan. These services rely on you being willing to put serious effort toward paying off your debts, so you get out of them what you put into them.

Still, the debt management plans (or DMPs) that a credit counseling agency can provide could be a lifesaver if you have good financial budgeting skills but just need a little help running the numbers. In these specific cases, a credit counseling agency can set up a special account with their organization. You’ll place monthly deposits into that account, and either you or the credit counseling agency will pay your creditors on time in an agreed-upon amount every 30 days.

These strategies do take time, however: they’re not a fast way to debt relief (or technically even at all – as with debt consolidation loans, you still eventually pay back your full owed amounts).

As with debt settlement services or companies, be sure to do thorough research on the legitimacy and customer reviews of a credit counseling service before signing up for a DMP or any other advice. There are plenty of scammers out there looking to waste your time and/or money.

🙌 How it helps:

  • Normally no cost
  • Can help build good payment habits/skills
  • Most provide educational/actionable advice

⚠️ Risks:

  • Some organizations are scammers
  • Very rare to pay off any debt immediately
  • Reliant on self-control/good payment habits

Coronavirus Debt Relief Strategies

Coronavirus Debt Relief

The COVID-19 pandemic has thrown the entire economy out of shape. If you’ve been uniquely affected by the coronavirus and its economic restrictions or struggles, there are specific debt relief strategies open to you.

  • Credit card relief programs – these are card company-specific offers and are only available to those who are struggling because of provable COVID-19-related causes. Contact your credit card provider and see if they have any relief programs or special offers. Many of these offer to forgive small amounts of debt entirely or may come in the form of refinancing opportunities not normally offered to consumers
  • Emergency forbearance – tons of credit card companies and lending institutions are allowing their users to reduce or skip payments for a certain period of time. However, these usually require consumers to make up skip to reduce payments after the forbearance timeframe ends
  • Refinancing – as mentioned above with mortgage or large loan refinancing, tons of lending institutions and credit card companies are offering limited time windows to refinance your loans or even get a better interest rate

With all of these options, be advised that you’ll need to have some documentation on hand in order to prove that you’ve been negatively affected by the COVID-19 pandemic. Furthermore, we’d recommend that you keep documentation of your new agreement, whatever form it takes. This may be necessary if bureaucratic hiccups accidentally result in a mix up between you and your lender.

Small Business Association Debt Relief

A limited time offer has recently come about from the US Small Business Association (SBA). In a nutshell, this association is currently offering to pay up to “six months of principal, interest and any associated fees” that borrowers owe for several types of common small business loans.

You don’t need to apply in order to get this assistance. It’s automatically applied to loans disbursed prior to September 27, 2020.

If your loan is on deferment, the SBA will start making up to six monthly payments when the next payment is due. If your loan is on deferment, they’ll make payments when the next payment is due after your deferment period has ended.

Why You Should Act on Debt Quickly

Debt relief is an important thing to consider because having too much debt for too long can be a terrible thing for your credit score and overall financial options. Debt isn’t necessarily a bad thing in and of itself, and indeed is a necessary part of purchasing many expensive things in one’s life (like a house).

However, your credit score is affected by a variety of things, including:

  • how many lines of credit you have open
  • your overall debt shared between creditors
  • how frequently you make payments
  • whether your payments are on time and in the appropriate amounts
  • how long your debt lasts

Since your credit score matters for everything financial, including what types of loans you can get, your interest rates, and how many additional lines of credit you can open, acting on your debt quickly is crucial.Obtaining some kind of debt relief that allows you to make payments more consistently is almost always a good thing.

But remember that debt relief doesn’t allow you to knock out all of your outstanding debts immediately. As with your credit score, improvement takes time – getting started on debt relief or otherwise paying down your debts sooner will result in your credit score improving sooner, as well.

Are There Reasons Not to Pursue Debt Relief?

While debt relief can be an advantageous strategy, there are some downsides. For an obvious one, debt relief doesn’t really work if you don’t build up excellent debt management habits in the process. If you got into lots of debt because you tend to open up lots of credit cards, you’ll just drag yourself back into debt after getting initial relief.

Furthermore, consider these debt relief dangers you may not have considered.

Don’t Forget to Consider Tax Consequences for Debt Relief

Just because you get some of your debt forgiven or “erased” doesn’t mean that you don’t have to pay taxes on that money. It depends on whether you are insolvent before you reached your debt forgiveness/settlement agreement.

To figure out whether you’ll owe taxes for any debt relief, consider the fair market value for your assets and the total settlement amount. If you were insolvent (as in, you can no longer meet your financial repayment obligations) before the settlement and your assets’ value was less than how much debt you have forgiven, you will owe taxes on the difference between the two values.

Here’s an example:

  • you agreed to a $20,000 settlement
  • you had a total asset value of $15,000 when you were insolvent
  • because you agreed to a settlement that was more than your insolvency asset value, you will need to pay taxes on $5000 – the difference between the two values

Be sure to contact a tax professional if you aren’t sure whether you’ll need to pay taxes for your relieved debt.

Debt Relief Scams: What You Should Know

Another big potential negative to seeking out debt relief is that you might fall into a scam. This risk is similar to the one you would face when seeking out any financial help from a third-party program or service, of course. But it’s worth mentioning.

Sometimes, credit counseling agencies aren’t actually qualified and may give you advice that leads you further into a debt spiral than you were before. In other cases, a terrible debt settlement company may do a poor job of negotiating on your behalf with creditors.

Here’s a good rule of thumb when navigating the debt relief waters: if something seems too good to be true, it probably is. Research any debt relief service or third-party company heavily before agreeing to any program or plan and rely on the testimonies of other people for vetting.

Is Bankruptcy a Viable Alternative?

Bankruptcy is normally something to be avoided, but it does have significant effects on your outstanding debts. Bankruptcy erases:

  • most types of credit card debt
  • unsecured personal loans
  • most medical debts
  • happens within three or four months if you qualify for Chapter 7 liquidation – a specific type of bankruptcy

However, bankruptcy does not erase:

  • taxes owed
  • child support obligations
  • student loan debt except in very rare circumstances

Bankruptcy is also a risky choice compared to debt relief because:

  • it absolutely destroys your credit scores and remains on your credit reports for up to 10 years. This can be extremely difficult to come back from, even if some debt relief strategies also have negative effects on credit score 
  • it doesn’t necessarily protect your property from being repossessed or taken away
  • any co-signers may have some or all of the debt transferred to them

So when weighing bankruptcy or debt relief options, which should you choose? It depends on your situation, and bankruptcy could be a viable alternative if you don’t have very many assets or much of a credit score, to begin with. However, it also comes with serious side effects.

For many people, bankruptcy is a last resort for good reason.

Debt Relief FAQs

  • Who Qualifies for Debt Relief?

    Anyone can qualify for debt relief in some form or another, although most debt consolidation loans or debt relief/settlement services from third-party companies will be easier to access if you have good credit and payment history for your outstanding debts.

    Nonprofit organizations or credit counseling services are usually open to anyone.

  • How do I Deal with Debt Collectors if I Can’t Pay?

    Actually, you can negotiate with debt collectors directly as another type of debt relief. The Fair Debt Collection Practices Act protects you from various unfair debt collection practices and prevents agents from being intentionally deceptive. Once you’re armed with your rights, you can speak directly to debt collectors and try to reach an agreement.

    For instance, you can negotiate a lump-sum payment or renegotiate your loan for installment payments for a reduced total debt amount. This is essentially the same strategy as asking for debt forgiveness from a lending institution; you’re just negotiating with a collector instead this time.

    If you do manage to reach an agreement, be sure to get the new agreement in writing as oral promises aren’t finding in the majority of circumstances.

    If a debt collector refuses to work with you, remember the Debt Collection Practices Act mentioned above, and don’t hesitate to get law enforcement involved if a collector breaks the rules. However, if they follow the law correctly, there’s nothing you can do to stop them from petitioning you about your debts unless you seek out debt relief or pay what you owe.

  • How Can I Settle my Debt Fast?

    You can’t. We’d recommend that you stop looking for a fast debt settlement solution right now, as the odds of your lenders forgiving all of your debt are slim to none.

    The best you can likely hope for is some debt forgiveness. But in all likelihood, the road to debt relief will take some time to travel.

    Prepare yourself for this now and you’ll be better equipped to make on-time payments and honor your new agreements.

  • Is There a Government Debt Relief Program?

    No, even if you hear otherwise from other sources. The government only seeks to protect individuals from unfair practices perpetuated by shady lending institutions. They will not provide debt relief for you.

  • How Much Does a Debt Relief Program Affect your Credit?

    This depends on the debt relief program in question. Some programs, like some of the debt settlement programs mentioned earlier, may cause you to inadvertently tank your credit score by advising you to stop making payments while you build up the cash for a lump sum payment.

    Other debt relief programs, by credit counseling services, could improve your credit score by teaching you excellent debt management strategies.Carefully weigh the pros and cons of a debt relief program or strategy, and how it might affect your credit score, before committing to any option. Check out a top credit monitoring service with your lending institution to keep a close eye on things.

  • How Long Does it Take to Rebuild Credit after Debt Relief?

    Depending on where your credit score is, rebuilding it to its former highs might take anywhere from 1 to 5 years. Consider that it takes between three and six months according to Experian to build up a decent credit score from scratch. If you have a bad credit score, it will likely take several years of on-time payments and good debt repayment strategies for you to return to a good score once more.

Wrap Up

Overall, debt relief strategies are certainly something worth pursuing if you’re having trouble managing your monthly payments and don’t think you’ll be able to keep your credit score afloat for much longer. Just keep in mind that there are plenty of awful programs out there, so be careful when choosing a debt relief strategy or negotiating with lenders.

What are your experiences with debt relief? Are there any solutions we didn’t mention? Let us know and let’s start a conversation.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.