Debt relief is an umbrella term that includes several potential solutions for reducing your debt burden. Some common options include debt settlement, debt restructuring, and more.
While there are some clear benefits to seeking debt relief, there are also some potential risks involved with the process. Understanding the debt relief pros and cons can help you determine whether it’s the right fit for you. Here’s what you need to know.
Pros of Debt Relief
If you’re struggling financially, debt relief may provide significant benefits in the long run. Here are some of those advantages.
Reduced Financial Stress
Carrying unmanageable debt can lead to anxiety, sleepless nights, and emotional distress. By negotiating lower payments through debt settlement or restructuring loan terms for more manageable payments, you may gain a sense of relief.
Potential for a Fresh Start
Knowing that a solution is in place can also enable you to focus on rebuilding your financial life rather than constantly worrying about your debt situation.
The debt settlement process allows you to satisfy your debt for less than what you owe, and eliminating that balance can free up cash flow you can use to boost your savings and meet your financial needs.
Debt restructuring, on the other hand, modifies the terms of existing debt, such as extending repayment periods or lowering interest rates, making payments more affordable. While it won’t eliminate the debt, it can make it more manageable, giving you room to get back on your feet financially.
Improved Credit Score Over Time
While debt settlement and restructuring may initially hurt your credit score, they can set you up for better credit health over time. With restructuring, for instance, you may be more likely to pay on time, which is the most important factor in your credit score.
With debt settlement, paying off one or more debts can make it easier for you to stay on top of payments and focus your attention on rebuilding your credit.
Avoidance of Bankruptcy
The prospect of filing for bankruptcy can be daunting due to its long-term financial and credit ramifications. While it may be the only viable option in some cases, debt relief can have less of an impact on your financial situation.
Cons of Debt Relief
While there are some clear benefits to seeking debt relief, it’s also important to understand the potential drawbacks. Here’s what to keep in mind before deciding whether it’s right for you.
Possible Negative Impact on Credit Score
Debt settlement and restructuring can significantly impact your credit score because they both indicate that you’re no longer paying your debt as you originally agreed.
When you settle a debt for less than the full amount or restructure your loan terms, lenders may report this to the credit bureaus, which can lower your credit score. Additionally, missed payments leading up to a settlement or restructuring agreement can leave negative marks on your credit report.
While debt relief can open the door for credit improvement over time, you’ll want to consider the immediate impact and the effort required to rebuild your credit.
Fees and Costs
Debt relief is rarely free, and the costs can add up quickly. Debt settlement services and law firms often charge fees based on a percentage of the total debt or the amount saved. Some may even require upfront payments before any negotiations begin.
If you opt for debt restructuring, you might face additional interest over an extended repayment period, along with potential administrative fees. Be sure to carefully review the costs associated with any debt relief service to determine if the financial benefits outweigh the expenses.
Not All Debts Qualify for Relief
Not every type of debt is eligible for settlement or restructuring. For example, secured debts like mortgages, auto loans, and some business debts may not qualify for a traditional debt settlement program. In some cases, student loans may also be excluded.
It’s also important to keep in mind that creditors aren’t obligated to accept a settlement offer or grant a restructuring request.
In other words, there’s no guarantee that you’ll get the outcome you expect. Consulting with an experienced debt attorney can help you determine whether your debts are eligible.
Risk of Scams and Fraud
People who are struggling with debt are often desperate, so it’s no surprise that a host of scammers are looking to exploit you at every opportunity.
Some fraudulent debt settlement companies make false promises, charging high fees without providing meaningful results. If a company guarantees debt elimination or pressures you into signing up quickly, that’s a red flag. Always research any debt relief provider, check for accreditation with the Better Business Bureau, and read customer reviews before making a decision.
Understanding Debt Relief vs. Debt Settlement
Debt settlement is a form of debt relief, but it’s not the only method. In addition to debt restructuring, you may pursue other potential options to resolve your debt situation. Here’s what to know.
Debt Consolidation Loan
Debt consolidation involves combining multiple payments into a single monthly payment with a new loan, such as a personal loan or balance transfer credit card, often with a lower rate. This simplifies payments and may provide relief from high interest rates. It can also help improve your credit if you manage the new debt well.
However, you typically need good credit to qualify for favorable terms, and it may extend your repayment timeline. It also doesn’t directly reduce your debt, nor does it resolve the underlying issues that led to your current debt situation.
Debt Settlement
Debt settlement involves negotiating with creditors to pay off unsecured debts, such as medical bills, credit card bills, and other unsecured debts, with a reduced amount as a lump sum or in installments. It can significantly lower the amount of debt you have to pay and prevent further collection efforts.
That said, it can damage your credit score initially, and the fees can be significant in some cases. It can take time to save up for your lump-sum payment, and there’s also no guarantee that your creditors will be willing to work with you.
Finally, note that settled debt may result in the forgiven debt being counted as taxable income.
Debt Restructuring
This type of debt relief modifies your loan terms, such as extending repayment time or lowering interest rates, to make payments more manageable. This can help you avoid default and, with secured loans, repossession or foreclosure.
However, restructuring options can vary depending on your lender, and this option may result in more total charges over time.
Credit Counseling
A credit counselor can provide professional financial guidance, often including a debt management plan (DMP) with lower interest rates and payments, waived late fees, and other benefits.
The process can make your payments more affordable, especially with high-interest debt, and it’s less likely to damage your credit score compared to many other debt relief options. However, you may be on the hook for monthly fees, and a successful DMP requires strict adherence to your plan, which can take three to five years to complete.
If you consider this option, make sure you research nonprofit organizations.
Bankruptcy
Bankruptcy can help eliminate or reorganize your debt through the legal system. With Chapter 7 bankruptcy, for instance, you can wipe out debt after liquidating some of your assets to pay off a portion of what you owe. In contrast, Chapter 13 creates a new repayment plan that allows you to pay off some or all of your debt over a period of three to five years.
In both cases, bankruptcy provides legal relief from debt, stops collection efforts (including debt collector lawsuits), and can give you a fresh start. However, bankruptcy can have a long-lasting impact on your credit score and overall financial health.
Factors to Consider Before Choosing Debt Relief
As you evaluate the advantages and disadvantages of debt relief, here are some things to consider to determine if it’s right for you.
Assessing Your Financial Situation
Take a closer look at your income, expenses, and total debt to get an idea of where you stand. Calculate your ability to make monthly payments and determine whether your debt problems are temporary and manageable in the coming months or if you need to seek relief.
If you can adjust your budget and pay off debt over time, relief options may not be necessary.
Understanding the Long-Term Implications of Each Option
Debt relief can help you get to a better place, but each option has a long-term impact on your financial well-being.
Some options, like settlement and bankruptcy, can hurt your credit score for years. Others, like consolidation or restructuring, may extend repayment time, increasing total costs. Research and assess each option to better understand their implications.
Evaluating the Credibility of Debt Relief Services
Not all debt relief companies are legitimate, so it’s important to research providers thoroughly. Check online customer reviews, verify accreditation, and watch for red flags like upfront fees or guarantees of debt elimination.
Stick with a reputable debt settlement company or law firm can help you avoid scams and further financial harm.
Exploring Alternatives to Debt Relief
Before committing to formal debt relief, explore alternatives like negotiating directly with creditors, cutting unnecessary expenses, or increasing income. A strategic budget adjustment or side hustle may be enough to regain control without long-term credit damage.
In other words, before you seek debt relief, make sure you don’t have a better option available.
The Bottom Line: Make an Informed Decision About Debt Relief
Debt relief programs can be a powerful tool to regain financial stability and become debt-free, but it’s not a one-size-fits-all solution. Weigh the benefits and risks carefully, considering how each option aligns with your long-term financial goals.
If needed, seek guidance or legal advice from a reputable financial professional who can help you take control of your debt and work toward a healthier financial future.
At Tayne Law Group, we offer a free phone consultation with one of our experienced debt relief attorneys. Whether you’re struggling to keep up with your credit card debt, falling behind on payments, or don’t have any money left over after paying your bills, there’s a good chance we can help you. When you’re ready for a free consultation, contact our law offices by calling (866) 890-7337 or filling out our short contact form. We never share or sell your information, and all conversations are confidential.
