Skip to main content

Why Debt Relief Plans Might Be Better than Debt Consolidation

4 minute read

By Jim Greene

Debt can leave you struggling to keep your head above water. Interest charges keep piling up and creditors start demanding payments. At a certain point, debtors become so saturated that it can seem mathematically impossible to ever become debt-free. People who find themselves in this situation often explore debt consolidation. That essentially combines all your various debts into a single loan that you can manage with one easy monthly payment.

While debt consolidation is convenient, it’s not necessarily the best option. Debt consolidations lenders are businesses, and businesses aim to make money. Thus, the terms they offer you will invariably be to their ultimate benefit, not yours. In some cases, the total amount you’ll pay over the life of a debt consolidation loan could even exceed what you would have paid to become debt-free without it. The good news is there’s an alternative — debt relief plans. These are well worth considering if you’re struggling to manage a heavy debt load.

What is Debt Relief and How Does it Work?

Debt relief programs are offered by agencies and companies that specialize in debt management and debt settlement. The terminology can be a little confusing. “Debt relief” is often interchanged with “debt management” and “debt settlement.” In essence, debt relief covers any strategy that helps you get out of debt. According to this definition, debt consolidation is technically a form of debt relief. So are credit card balance transfers that allow you to take advantage of lower interest rates. But in actual usage, debt relief usually refers to two specific approaches: debt management and debt settlement.

Debt Management

Consumers access debt management assistance through credit counseling agencies. These agencies will contact each of your creditors on your behalf, work out a realistic and affordable plan to pay down your debt, then manage the payments for you. You’ll only make a single monthly payment, and the agency will disburse the funds to your creditors for you.

Debt Settlement

Debt settlement works a little differently. By definition, these plans include agreements that allow you to settle the debt for less than you actually owe. Creditors would rather get, say, 50% or 75% of what you owe them rather than nothing — which is what they’d receive if you were forced to declare bankruptcy. When you opt for a debt settlement program, you’ll usually decide which of your debts you want to include. Consumers generally elect to settle their largest and most cumbersome debts while paying off smaller debt balances in full.

So, for the purposes of this discussion, we’re going to consider debt consolidation loans separately from debt relief. When we talk about debt relief, we mean strategies that use either debt management or debt settlement as the core approach. If you prefer though, you can find out more about debt consolidation right here.

Also, keep in mind that credit card debt is just one of many kinds of debt that qualify for management or settlement programs. You can also use these options to cover other debt that might have gone to a collection agency. Additionally, debt relief could work for personal loans, car loans, repossessions, and medical bills. However, student loans are not currently eligible.

What Are The Advantages of Debt Relief?

The major advantage of debt relief is that it can save you thousands of dollars compared to what you would pay to settle your debts through a consolidation loan. Many settlement programs offer consumers the option to make large, lump-sum payments covering a portion of your total balance. In exchange, the creditor will agree to forgive the remainder of the debt. You can free yourself from the massive interest charges that accrue on unpaid debts, which are often the single leading reason many people cannot lift themselves out of debt on their own.

Debt relief programs also offer a fast track to repairing your credit score. Consolidation loans often just keep you in debt for longer while drying up your debt-to-credit ratio. That keeps your credit rating wallowing in undesirable territory. Relief programs get you debt-free faster, which means you’ll be able to rebuild your credit score with much greater ease.

Are There Any Drawbacks to Debt Relief?

If you stay the course in a debt management program designed to repay 100% of your outstanding balance, there aren’t any major drawbacks compared to debt consolidation. They represent a much better option — one that protects your interests rather than acting to line the pockets of consolidators. While some consolidation programs offer reasonable terms, others do little more than present the illusion of offering a solution when they really just draw consumers deeper into debt.

Debt settlement, on the other hand, does have some down sides to consider. When you settle a debt for less than the actual amount you owe, a record of the transaction will appear on your credit reports. It will remain there for years, informing future lenders that you have a history of settling debts for less than the full amount. This can negatively impact your credit rating, limiting its ability to fully heal. Lenders may also be more reluctant to offer you future credit, even if you demonstrate greater levels of responsibility after settlement.

However, most personal finance experts still recommend settlement over consolidation for the simple reason that it will save you money in the long run.

The Last Word

If you do decide to explore debt relief as an alternative to debt consolidation, you should still perform careful due diligence. Compare the programs, terms, and conditions offered by at least three or four different agencies or relief providers. Weigh the relative merits and drawbacks of each option, and always consider the long-term impact of each proposal on your credit rating.

Debt Relief Next Exit Highway SignShutterstock

Jim Greene


Jim Greene is a freelance writer based in the Toronto, Canada area. He has been writing professionally since 2001 and has an extensive professional background in consumer research, personal finance and economics.


How Much You Should Spend on an Engagement Ring and What To Look For Wedding Ring Around Rolled Up $100 Dollar Bill Financial Advice

How Much You Should Spend on an Engagement Ring and What To Look For

Spending three months’ worth of salary might be the rule of thumb, but is it necessary? That depends on a variety of factors, including your financial situation and your partner’s style. When it’s time to buy a ring, keep the 4Cs in mind: Cut, Color, Clarity, and Carats. Engagement rings can be marked up 600% […]

Read More about How Much You Should Spend on an Engagement Ring and What To Look For

8 minute read

Is Pinching Pennies The Ultimate Secret To Wealth? Financial Advice

Is Pinching Pennies The Ultimate Secret To Wealth?

I’ve always identified myself as a penny pincher. However, I wouldn’t necessarily say I’m proud of that label. Then again, I’ve never fully shied away from it either. After all, I credit my willingness to scrap and save for giving me courage to jump into the unknown of entrepreneurship when I started, all those years […]

Read More about Is Pinching Pennies The Ultimate Secret To Wealth?

8 minute read

Widow’s Pension: Everything You Need to Know Financial Advice

Widow’s Pension: Everything You Need to Know

Qualifying military members can set up a Survivor’s Benefit Plan (SBP) upon retirement. The SBP, along with standard Social Security, can be used by a widow to stay financially afloat. Both the deceased veteran and the surviving spouse must meet certain conditions to qualify for a SPB. The payment amount depends on a number of […]

Read More about Widow’s Pension: Everything You Need to Know

6 minute read

Reducing Debt: Is Your Debt Like a Yo-Yo Diet? Financial Advice

Reducing Debt: Is Your Debt Like a Yo-Yo Diet?

You’ve probably heard the term “yo-yo dieting” before. It’s the problem that many people face when they attempt to lose weight. They will make drastic, unsustainable changes to their exercise and diet plans. The weight drops off, they relax their diet and start skipping gym days, and the weight comes roaring back. Rinse, repeat, ad […]

Read More about Reducing Debt: Is Your Debt Like a Yo-Yo Diet?

9 minute read

Is Thanksgiving Being Taken Over by Consumerism? Financial Advice

Is Thanksgiving Being Taken Over by Consumerism?

One of my favorite holidays is Thanksgiving. It’s one of the simplest of holidays. You can celebrate it without a lot of fuss — and without the need for elaborate décor or expensive presents. Thanksgiving has long been considered a holiday mostly untouched by consumerism. After all, what is less consumer-based than gathering with family […]

Read More about Is Thanksgiving Being Taken Over by Consumerism?

7 minute read

Do You Truly Understand The Impact Of Your Financial Decisions? Financial Advice

Do You Truly Understand The Impact Of Your Financial Decisions?

Too often, we think of our financial decisions as being made in a vacuum. For example, we figure that the investment choices we make only affect us in terms of gains or losses. Or the decision to fund a 529 education account only means your child will have a better chance of making it through […]

Read More about Do You Truly Understand The Impact Of Your Financial Decisions?

7 minute read

Simple (But Not Easy) Tips for Financial Success Financial Advice

Simple (But Not Easy) Tips for Financial Success

Whether it’s through a blunt comment online, a gentle reminder in person, or just by the look on their face, people tell me the same thing all the time. “David,” they say, ” I already know everything you’re saying to me right now. I want to be financially free. I don’t need someone to rehash […]

Read More about Simple (But Not Easy) Tips for Financial Success

6 minute read

See all in Financial Advice