Debt relief programs: Pros and cons

If you've got what seems like an insurmountable amount of credit card or other debt, you're not alone. According to recent reports, the average American household has approximately $9,326 in credit card debt in 2025.

High debt balances can cause you to delay (or, in some cases, forgo) major life milestones, like owning a home, raising a family, or starting a business. If your life is on pause due to your debt, you may wonder if there's an easier or faster path to freedom.

Enter: debt relief. This post will explore what debt relief is, walk you through the programs available, and break down the pros and cons of each option. That way, you can put a plan in place to become debt-free.

Debt relief: An overview

Debt relief is a broad term that covers several strategies you can use to pay off debt more quickly, easily, or affordably (or sometimes a combination of these). Debt relief may involve:

• Consolidating high-interest debt with a lower-interest-rate loan.
• Settling your debt for less than you owe.
• Working with a financial professional to develop (and stick to) a debt repayment roadmap.
• Asking the court to forgive or restructure your debt by filing for bankruptcy.
  

Debt relief programs: pros and cons

Debt settlement: pros and cons

When you hear someone say "debt relief," you probably think of debt settlement. Debt settlement is the process of negotiating reduced balances with your creditors. That way, you can get out of debt for less money than originally owed. While you can negotiate your own deals, many people hire a third party that specializes in debt settlement to help.

Pros

• You may be able to settle your accounts for as little as half of what you originally owed, resulting in significant savings.
• You may be able to get out of debt faster.
  

Cons

• Your account usually needs to be in default to qualify, which means your credit score has been significantly damaged.
• You'll stop paying your creditors (if you haven't already) in favor of paying into an account the company can use to negotiate settlements, causing your credit score to drop.
• You need to be able to afford the monthly payment to the settlement company, which can make a tight budget even tighter.
• Your creditors don't have to cut you a deal. They can still sue you and keep upping what you owe with interest charges and fees.
• You'll have to pay the third party for the service, which reduces the savings you receive from the settlement deals.
• Your forgiven debt may be considered taxable income, which could mean a higher bill at tax time.

Debt management plans: pros and cons

A debt management plan works similarly to a debt settlement plan in that you stop paying your creditors directly and make a single monthly payment to a third party (in this case, generally a non-profit credit counseling agency). The agency then sends your money to your creditors on your behalf.

When you go this route, you'll eventually repay the entire amount you owe. However, the agency may be able to negotiate lower interest charges and account fees, saving you some money and potentially shortening your path to debt freedom.

Pros

• You'll have a clear plan to become credit card debt-free.
• You may save money on interest and fees.
• You may receive financial coaching from a credit counselor to help you learn how to create (and stick to) a budget, avoid future credit card debt, and save money.
• You'll repay the full principal balance, which looks better on your credit report than settling the account for less.
• You may be able to pay off your debt faster.

Cons

• Your plan will likely take a long time to complete – usually three to five years.
• You'll probably have to stop using the credit cards enrolled in your plan.
• Your credit score could drop if there's a gap between your last payment and the agency's first.
• You may have to pay for the agency's services.
• You can't enroll secured debt, such as your mortgage or auto loan, in your plan.

Debt consolidation: pros and cons

Debt consolidation involves replacing multiple high-interest debts with a single, lower-interest option. Many consumers use personal loans or balance-transfer credit cards, but homeowners with larger balances may also consider home equity financing—such as a home equity loan, HELOC, or a home equity investment (HEI)—to access lower rates or more flexible terms.

How consolidation typically works

• Unsecured options: Personal loans and balance-transfer credit cards
• Home equity options: Home equity loans, HELOCs, and HEIs (which offer cash upfront and no monthly payments in exchange for a share of future home value)

Pros

• You can save a significant amount on interest, especially if you qualify for a lower rate or use a 0% APR balance-transfer offer.
• Home equity options may offer lower rates than unsecured loans, making them useful for consolidating larger balances.
• Consolidation simplifies repayment by rolling multiple bills into one.
• You may have a long repayment window: up to 6 years for many personal loans and even longer for some home equity products.
• A balance-transfer card can help you avoid interest entirely during the promotional period.

Cons

• Good to excellent credit is often required for the best rates on personal loans or balance-transfer cards.
• Consolidation may come with added costs: personal loan origination fees, balance-transfer fees (typically 3%–5%), or closing costs for some home equity loans or HELOCs.
• You must pay off a balance-transfer card before the 0% APR period ends to avoid interest at the standard APR.
• Using home equity puts your home at risk if you default on the loan.

Bankruptcy: pros and cons

Most financial professionals agree: Filing for bankruptcy should be a last resort if other debt relief options won't work for you. There are two forms of bankruptcy that may be available to you: Chapter 7 and Chapter 13.

The goal of Chapter 7 bankruptcy is to have the court forgive your debts, wiping your financial slate clean. However, you must meet strict income-related criteria to qualify.

If you're ineligible for Chapter 7, Chapter 13 can help alleviate the financial pressure by putting you on a structured, three to five-year repayment plan. While you'll still owe your creditors, getting a Chapter 13 bankruptcy in place can help you afford your debt and will put an end to the endless collection calls you were probably getting.

Pros

• You might be able to walk away debt-free. Otherwise, you'll leave with a clear path to debt freedom.
• You may be able to get out of debt faster – even with a Chapter 13 bankruptcy.
• You may be able to keep your house and car.
  

Cons

• Your credit score will take a severe blow, with effects lingering for up to a decade.
• You'll have to pay court costs to file, and you may need to pay attorneys' fees if you don't represent yourself.
• You'll be in repayment for up to five years with a Chapter 13 bankruptcy, potentially causing you to postpone major life plans.
• Your federal student loans (if applicable) generally can't be discharged in bankruptcy, potentially leaving you with some debt.

Is debt relief right for you?

There are many debt relief programs out there, each with its own pros and cons. The right solution for you will depend on your current credit standing, ability to pay, and personal preferences. If you're unsure which route to take, consider consulting a qualified financial professional for personalized guidance.