What Is a Debt Relief Service? The 3 Types Explained

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There are three primary options for debt relief: debt settlement, debt management, and debt consolidation. While they have similar objectives -- to help you manage and pay off your debt -- they all operate with some slight differences.

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According to a recent survey, approximately 300 million Americans have some form of debt.[1] That’s a lot of people — and a lot of debt.

What if you want to take control of your debt and figure out how to pay it off? Books, websites, and even personal finance podcasts can help, but many people are turning to debt relief services for assistance. Apart from the catchy radio commercials that promise to get debt collectors off your back, what exactly does debt relief entail?

Debt relief services can be a viable solution for some, but there may be a better option for your situation.

What Is a Debt Relief Service?

A debt relief service is a third-party organization that works with you and your lenders to reorganize or restructure your debt so you can satisfy your repayment obligations.

These are typically for-profit companies. They generally charge hefty fees for clients to use their services. However, they provide an alternative to bankruptcy, which can sometimes come with much harsher long-term effects.

Types of Debt Relief Services

There are three primary options for debt relief: debt settlement, debt management, and debt consolidation. While they have similar objectives — to help you manage and pay off your debt — they all operate with some slight differences.

Debt settlement

In a debt settlement, you negotiate with your creditors to reduce or eliminate the amount that you owe. This can include balances, interest rates, due dates, and other factors like late fees and over-limit charges. You can work directly with your various creditors to do this or you can use a third-party vendor to negotiate on your behalf.

Pros: Having a third-party negotiate on your behalf makes it more convenient. They handle all communication and payments to your creditors, which is great if you’re not comfortable doing that on your own.

Cons: These providers often charge a monthly fee for their service, and that fee can often be more than you can afford. You might also owe taxes on the canceled debts and your credit might be negatively impacted.

Debt consolidation

With debt consolidation, all of your debts will be combined into one single debt. This is generally accomplished by taking out another loan, usually a personal loan, or transferring your credit card balance to a card with 0% APR. You can do this on your own or through a debt relief company.

Pros: Combining your debts into one payment reduces the number of bills you have to pay. You can also consolidate both secured and unsecured debt, and it might help your credit score in the long run. You can consolidate your debt into one monthly lump sum through personal loans, low-interest loans, or credit card balance transfers.

Cons: If you use a third-party debt consolidation firm, you might have to pay hefty fees. Even though you only have one payment, it might take you longer to pay off this larger balance. In the short-term, it can negatively affect your credit score, and it doesn’t necessarily encourage any behavioral changes that caused the initial debt.

Related: Should You Pay Off Debt or Save Money? Here’s How to Decide


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Debt management

Debt management is an option for working with creditors via a third-party organization to consolidate your unsecured debts, like credit cards or personal loans, into one monthly payment.

Pros: You’ll only have to make one monthly payment at a lower interest rate, and you might be able to pay off your debt faster.

Cons: Not all creditors participate with debt management plans. You’ll need to stay on top of your payment; missing one can forfeit your enrollment, and your credit score will be negatively impacted.

When Should You Use a Debt Relief Service?

If your debt is more than you can handle, getting some relief makes it more manageable. You might wind up paying less in interest or late fees because there’s only one payment to manage.

There’s also the psychological benefit of seeing the balance go down so you feel encouraged to keep making progress. It might free up some money in your budget to apply toward other needs, like your grocery budget or car maintenance.

Not all of your creditors will want to settle your debt. If that’s the case, you’re still obliged to pay the full amount including any interest, late fees, or other charges you might have incurred.

How to Find a Reputable Debt Relief Program

If you’re going to use a debt relief program, it’s important to do your research and pick one that’s reputable, trustworthy, and reliable. You can research sites like TrustPilot or the Better Business Bureau for ratings, reviews, and complaints.

You can also perform a quick Google search with the company’s name to read testimonials and reviews from actual consumers.

Make sure to research things like:

  • Does it charge you upfront? According to the Telemarketing Sales Rule[2], it isn’t allowed to do that.
  • If it has advised consumers to stop paying bills. Doing so can put those accounts into collections, further harming your credit score.
  • If it promises things that seem too good to be true. It’s good to be optimistic, but not to expect things that aren’t possible.

Make sure you ask lots of questions during your initial assessment. If you don’t get a good feeling about the company, or it exhibits some of the above characteristics, it may not be legit.

Related: 7 Simple Steps to Increase Your Credit Score

Avoid These Debt Relief Options

Even if your debt has become unmanageable, using some of these options can make your financial picture even bleaker.

Borrowing against your home equity. This can compromise the money you’ll get if you need to sell your home and risk foreclosure if you can’t make the payments.

Borrowing against your retirement savings. You risk having to pay taxes on the money if you lose your job and losing extra money in compound interest.

Delaying payment on secured debt to make a payment on an unsecured one. Doing this puts you in a position to lose the collateral on the secured loan. If that collateral is something like a car, you’ve now lost the ability to get to and from work.

Succumbing to pressure from creditors. Don’t give in to what creditors tell you to do. Their job is to get the money owed to them, not to look out for your best interest. Make the payments that you must, and try to work out a deal for the rest.

Avoid borrowing against your future to pay for past mistakes. If you’re still struggling with your debt, there are some debt relief alternatives that can help.


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Alternatives to Debt Relief Programs

If you’ve done your research and you’re still wary of using a debt relief program, there are a few other options to consider.

Credit counseling

Credit counseling is a service provided by nonprofit organizations like the National Foundation for Credit Counseling[3] to help customers learn to live on a budget, pay down their debts, and improve their overall financial picture. Counselors can also help you organize a debt management plan.

Pros: They’ll help you consolidate your debts, offer a wide range of services including free educational materials, and debt repayment may take less time.

Cons: Credit counseling comes with a fairly high monthly fee. It may be difficult to qualify for their debt management plans depending on the types of debts you have, and your credit cards will be frozen.


Unlike the other options, bankruptcy is a legal proceeding that clears all or most of your debts while your creditors and lenders still receive some repayment. You can file either Chapter 7 or Chapter 13 bankruptcy. If you go this route, speak to an attorney before you decide which one to take.

Pros: With bankruptcy, your debts are forgiven and debt collectors can no longer call you to collect on what you owe.

Cons: Not only can it be costly to file bankruptcy, but not all debts can be included. For instance, you typically cannot include student loans in bankruptcy filings.

Bankruptcies stay on your credit report for up to ten years, making it more difficult to obtain other loans and other services like apartment rentals. If you do secure a loan, the interest rates can be substantially higher. And if you file Chapter 7, you can lose your assets, including your house or car.

Negotiate your own debts

Negotiating your own debts means you contact your creditors and lenders and work out a payment arrangement with them. That could mean anything from consolidating balances, lowering interest rates, or offering to pay a lump sum. You can also formulate your own plan to get out of debt using the debt snowball or debt avalanche methods.

Pros: This allows you to take control of your debt situation by creating your own timetable with payment amounts that you can afford. You don’t have to worry about a third party handling your payments or paying it a management fee.

You might be able to maintain a higher credit score, and there will be no marks on your credit report. Because you’re working through this on your own, you’ll still need to address the behaviors that caused the situation in the first place so that you don’t fall back into debt.

Cons: Because you’re doing this on your own, you have no one holding you accountable, making it easier to “cheat” on your plan. As an individual, you might not have some of the authority that a third-party company might have. Therefore, some creditors may be less likely to negotiate with you. It might also take longer, and you’ll still have to remember to make all the different payments each month.

Related: Here’s What People Mean When They Talk About “Good Debt vs. Bad Debt”

Is a Debt Relief Service the Right Choice?

A debt relief program can work, and it may be the right choice depending on your situation, the kinds of debts you have, and if your creditors are willing to negotiate. It also depends on how faithful you stay to your plan. If you’re paying on time every month, not taking on any new debt, and sticking to your budget, then this type of program can be beneficial.

However, lenders don’t have to accept your settlements, and participating in a debt relief program can negatively impact your credit. It might also take you longer to pay off your debt using one of these services, not to mention the high fees many agencies charge.

In some cases, a debt settlement company may encourage you to stop making payments on your debts, which will then show up as delinquent accounts on your credit report.

You have to weigh the pros and cons of using a debt relief program. Remember that if you aren’t comfortable with any of the terms or conditions, there are other ways to get out of debt.

Jana Lynch

A tireless advocate for financial abuse survivors, Jana spent over a decade working in the social services sector after obtaining her Master's in Urban Affairs and Public Policy from the University of Delaware. Since making the switch to freelance writing and editing Jana has worked with a number of high-profile websites including The Penny Hoarder, ChooseFI, Frugal Rules, The Dollar Stretcher, and more. She also works closely with The Plutus Foundation, where she served as the Director of Grants and Programs for four years.

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