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Table of Contents

Debt Relief: How It Works, Programs, and Examples

What Is Debt Relief?

Debt relief involves the reorganization of a borrower's debts to make them easier to repay. It can also give creditors a chance to recoup at least a portion of what they are owed. Debt relief can take a number of forms, including reducing the debt, lowering the interest rate on it, or extending the period for repayment, among others.

Creditors are often willing to consider debt-relief measures when the alternative is total default by the borrower. Those eligible for debt relief can range from individuals and small businesses to large corporations, municipalities, and even entire nations. This article focuses on individuals.

Key Takeaways

  • Debt relief refers to measures to reduce or refinance debt in order to make it easier for the borrower to repay it.
  • Options for debt relief include forgiving a portion of the debt, lowering the interest rate, stretching payments over a longer period, or consolidating multiple debts into a single, lower-interest one.
  • Individuals, businesses, and governments may all seek debt relief when their debts have become unsustainable.

Types of Debt Relief Programs

Debt relief can come in a variety of forms. Those include debt consolidation, debt settlement, and bankruptcy. Here is a brief overview of each type and when they may be appropriate.

How Debt Consolidation Works

Debt consolidation involves taking out a new loan or other debt and using it to pay off several existing debts. Typically, the new debt will carry a lower interest rate than the old debts, making monthly payments less expensive.

Even borrowers who aren't facing debt trouble can often benefit from debt consolidation. For example, they may transfer their existing credit card balances to a new card, especially one that charges little or no interest during an introductory period. Or they might take out a home-equity loan and use it to pay off their credit cards.

Of course, for borrowers who are deep in debt, obtaining new credit at a good interest rate (or even at all) can be a challenge. If that's the case, you have a couple of options. One is to consult with a reputable credit counseling agency, which can advise you on what kinds of consolidation loans might be available to you, as well as lay out your other alternatives. Credit counseling agencies can often help arrange a payment plan with your creditors, such as one that stretches your debt repayments over a longer period of time.

Another option is to try to negotiate directly with your creditors. As the Consumer Financial Protection Bureau points out, "Some creditors might be willing to accept lower minimum monthly payments or change your monthly due date because they would rather get paid less on a regular basis—than not get paid at all."

How Debt Settlement Works

Unlike debt consolidation, which may not change how much money you owe, the goal of debt settlement is to pay off your debts for a lesser amount, often in the form of a single lump sum.

You can attempt to negotiate with your creditors yourself or hire a debt settlement company to handle some of the work for you. Be careful, though, as this is an area that is rife with fraud.

As an example of a debt settlement, you might offer to pay a creditor that you owe $10,000 a lump sum of $7,500 (or three $2,500 installments) to settle the debt. It is entirely up to the creditor whether to accept your offer, but they might be inclined to if they believe that the alternative is receiving nothing or if they don't want to go through a long, drawn-out process in order to recoup their money.

Note that if the creditor in question reports transactions to credit bureaus, your settled debt will remain on your credit report for seven years, which can have a negative impact on your ability to get credit in the future.


Even the Internal Revenue Service can be willing to negotiate debts it is owed. People with federal tax debts that they are unable to pay can apply to the IRS for what the agency calls an offer in compromise.

How Bankruptcy Works

Bankruptcy is often referred to as a last resort for getting out of debt, and it can have severe consequences, remaining on your credit report for up to 10 years. Even so, it is the route many Americans ultimately choose. In 2022, for example, there were nearly 388,000 personal bankruptcy filings in the United States.

Most individuals who file for bankruptcy use either Chapter 7 or Chapter 13. Chapter 11 is also available to individuals, but it is generally used by businesses.

In a Chapter 7 bankruptcy, the person's assets, except for certain exempt ones, are sold off by a trustee, who uses the proceeds to pay back their creditors to the extent possible. Most of their remaining debts are then discharged. Chapter 7 bankruptcy can remain on your credit report for up to 10 years.

In Chapter 13, the debtor is allowed to keep more of their assets, but they must agree to a plan to pay off their creditors, typically within three to five years. Chapter 13 bankruptcy can remain on your credit report for up to seven years.

For obvious reasons, many creditors will shy away from doing business with individuals who have declared bankruptcy in the past. However, if they keep up with their bills going forward, they can rebuild their credit over time.

Can You Consolidate Student Loans?

You can consolidate student loans, but you'll want to study up on the process first because there are some potential pitfalls. For example, if you consolidate federal student loans into a private loan, you'll lose the protections, flexible repayment options, and forgiveness possibilities that federal loans provide. If you consolidate your federal loans into a single federal loan, you won't get a lower interest rate, although doing so can have other advantages in some cases.

How Much Do Debt Settlement Companies Charge?

According to the National Foundation for Credit Counseling, that can vary depending on state laws, but it will often range from 15% to 25% of the total debt. The group adds that the process typically takes from three to four years.

What Types of Debts Are Not Discharged in Bankruptcy?

The debts that won't be discharged in bankruptcy vary from one chapter of bankruptcy to another, but they commonly include child support and alimony, certain tax claims, and debts owed to governmental units, such as fines and penalties.

The Bottom Line

When people get into more debt than they can handle, debt relief may be their only way out. However, all forms of debt relief can have negative consequences, which the debtor should try to understand before they proceed.

Article Sources
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  1. Consumer Financial Protection Bureau. "What's the Difference Between a Credit Counselor and a Debt Settlement or Debt Relief Company?"

  2. Consumer Financial Protection Bureau. "I've Seen a Lot of Advertisements for Companies That Consolidate Credit Card Debt. Are These Legitimate?"

  3. Federal Trade Commission. "Debt Relief Service and Credit Repair Scams."

  4. Experian. "How Long Do Settled Accounts Stay on a Credit Report?"

  5. Internal Revenue Service. "Offer in Compromise."

  6. American Bankruptcy Institute. "Bankruptcy Filing Trends in the Unietd States," Page 3.

  7. Consumer Financial Protection Bureau. "Should I Consolidate or Refinance My Student Loans?"

  8. U.S. Department of Education, Federal Student Aid. "What Are the Pros and Cons of Loan Consolidation?"

  9. National Foundation for Credit Counseling. "Does Debt Settlement Make Sense for You?"

  10. United States Courts. "Discharge in Bankruptcy – Bankruptcy Basics."