When you’re in debt, it’s natural to wonder how to get relief. How to feel relieved. How to ditch the sleepless nights and stop the horrible feeling that no matter what you do—you’re always underwater. Always weighed down.
Take a deep breath and know this: There. Is. Hope. But there are also scammy companies who want to take advantage of you and your willingness to do anything to relieve the pressure of debt.
Let’s look at how to avoid the scams and find real hope in your situation. We’ll answer the question, “What is debt relief?”, break down each type of debt relief, and clear up the confusion on which types are life preservers and which are cinderblocks.
What Is Debt Relief?
Debt relief is a reduction, reorganization, refinancing or (sometimes) forgiveness of your debt. If that sounds like a pretty broad definition, that’s because debt relief can cover a lot of things. From bankruptcy to consolidation to the full freedom that comes from paying off your debt for good, debt relief comes in a lot of shapes and sizes.
Types of Debt Relief
Let’s start by breaking down the different types of debt relief. It’s important to remember that not every option is good—no matter how amazing it sounds at first. Some downright suck. Here are the facts and challenges that come with each one.
1. Financial Coaching
You might wonder why coaching is at the top of our list of debt relief options. Well, whatever path you’re about to walk, it’s super helpful to start by talking it out with a professional.
You can pay off debt faster! Get started with a FREE trial of Ramsey+.
A financial coach can help you sort through your options and overcome your fears—with zero judgement or shaming. You’ll get a clearer picture of where you stand so you aren’t overwhelmed and are ready to make the best decision about what’s next.
2. Debt Consolidation
Another form of debt relief is debt consolidation: the process of combining several debts into one monthly bill with a streamlined payoff plan. Okay, so what’s wrong with that? Sounds like a winning situation, right?
Sadly, no. Of the four types of debt consolidation, we’re only in favor of one. All the others basically kick you when you’re down. Let’s see why.
- Debt consolidation loans
- Credit card balance transfers
- Home equity line of credit (HELOC)
- Student loan consolidation
First, there are debt consolidation loans. This is a personal loan that combines several debts into one monthly payment. Okay, at first, that sounds great. One less thing to worry about, right? But it’s a horrible deal—both now and down the road.
Debt consolidation loans come with an extended payoff date (aka dragging out payments way longer), extra fees due pronto, and typically a higher interest rate than what you started out with! If that’s not bad enough, sometimes you have to put your home or car up as collateral for the loan. That’s a huge risk.
Next, let’s talk about credit card balance transfers. This kind of debt consolidation gives you a new credit card that combines the debt of all your other credit cards into one monthly payment—a payment that comes with fees and a hefty spike in interest if you’re ever late paying it. That’s not relief. That’s more money out the window and more worries over your payments.
There’s also something called a home equity line of credit (HELOC). It’s when you borrow against the equity in your home to get a secured loan so you can use that money to pay off your other debts. Basically, you trade the part of your home you actually own (the equity) for more debt. No, thank you.
The last kind of debt relief is called student loan consolidation. It rolls your federal student loans into one lump payment. Now, that’s a strategy we can get behind—if you follow this checklist:
- Be sure there’s no charge to consolidate.
- Secure a lower and fixed interest rate.
- Get a repayment period that’s shorter (never longer).
- Stay fired up to pay off your debt.
So, student loan consolidation might make sense to get you some debt relief—but the other types of debt consolidation? Just. Say. No.
Why? Look back at that student loan consolidation checklist. Those are safety measures to make sure you don’t get screwed over by a company when you’re trying to get out of debt. And the right kind of student loan consolidation company will hit the mark on each bullet point.
But debt consolidation loans, credit card balance transfers, and HELOCs completely miss those marks. In fact, their checklist is really just a bunch of red flags warning you avoid them. At all costs. All you get is:
- Upfront charges, fees or closing costs
- Fluctuating interest rates (because of late payments or the whim of the lender)
- Longer repayment periods that keep you in debt longer
- More debt
Hopefully this peek behind the curtain revealed the truth: The only thing those debt relief options can help you do is fall further behind.
3. Debt Settlement
If you hired a debt settlement company, you’d expect them to negotiate a lump-sum payment with your creditors for less than what you owe. That’s what they promise, anyway. Does that sound too good to be true? Probably—because it is.
These companies charge a fee for their “services,” often somewhere between 20–25% of your debt! That’s a heck of a lot. Look at the math here: If you owe $30,000, your settlement fees would range from $6,000–7,500.
But wait. It gets worse.
Most debt settlement companies tell you to stop paying your debts and to start paying them. They claim they’ll negotiate with your creditors to settle those debts for you.
But . . . typically these companies take your money and run. That leaves you on the hook for back payments and late fees because nobody’s been covering your payments. Plus, you’ve lost all the cash you forked over to the debt settlement company. You’re deeper in debt than when you started.
It’s. A. Scam. You need to make like a bird and fly far, far away from this.
4. Student Loan Deferment, Forbearance or Forgiveness
There are several options for student loan debt relief, including deferment, forbearance and forgiveness. If you have student loan debt (and 45 million Americans do), you’ve probably heard these words.1 Let’s talk about each one.
Deferment is a pause on your student loan payments. But—and don’t miss this—the interest often keeps accruing (building up), even while you’ve paused your payments. The interest gets stacked on top of what you already owe. Yeah—it’s not a good deal.
Forbearance is a pause on or reduction of your student loan payments. The interest always builds up when your student loan is in forbearance. But you can decide to keep paying the interest, which is better than letting it grow and blow up your balance. But it’s still not a good plan.
Forgiveness means you don’t have to make payments on your student loan because of your job. Generally, you’re either working a career that qualifies you for forgiveness or you’ve lost your job or some income.
This sounds awesome—until you hear that the process of applying is crazy hard and the likelihood of actually getting your loans forgiven is super rare. Don’t bank on this option.
Refinancing student loans or your mortgage might bring some debt relief—but only in certain circumstances. Here’s what we mean.
Student loan refinancing is a good idea if and only if you can check these boxes:
- Get a fixed, lower interest rate.
- Secure a shorter payoff term.
- Find a lender who doesn’t charge for the service.
- Nab a lower interest rate.
- Don’t lose motivation to pay off your student loans.
Mortgage refinancing works differently. It always comes with closing costs, so it might not be the best route to lower your debt right now.
However, if you bought when rates were absurdly high, and they’re now absurdly low, it’s possible refinancing could get you a lower mortgage payment. You might even be able to make the switch from a 30-year to a 15-year loan (which is an awesome long-term debt relief move we highly encourage) and still have a lower monthly mortgage payment!
We’re about to get real technical, but stay with us. Bankruptcy is when you tell a judge you can’t pay your debts in a formal court proceeding. That judge and a court trustee spend time going through your assets (what you own) and liabilities (what you owe).
Then they decide if they’re going to discharge (cancel) any of your debts. Basically, they’re looking to see if you really aren’t able to pay back your debt. And if they believe that’s true, you’ll start the official process of declaring bankruptcy.
Bankruptcy might seem like a great idea if you’re drowning in debt. But the truth is, it takes a lot of work, time and emotional energy to go through a bankruptcy—and it doesn’t even get rid of all your debts. Unpaid taxes, alimony, child support, government debts, court fines, any reaffirmed debt, and even most student loans (yikes!) aren’t cleared in a bankruptcy.
Also, it’s expensive and stays on your credit report for a whopping seven to 10 years.
These are a few of the reasons bankruptcy should be your absolute last resort when you’re looking at different types of debt relief.
7. The Debt Snowball
So far, your options seem, well, not so great. But there is a tried-and-true debt relief plan that truly helps every single time. It’s called the debt snowball.
We’ve pointed out the facts and difficulties that come with the different types of debt relief—and we’ll do that with this one too. Are you ready? The only problem with the debt snowball is that it takes work.
But. It. Works. So, it’s worth it.
Here’s a rundown of how you pay off your debt with the debt snowball:
List your debts in order from smallest balance to largest. (Ignore the interest rates right now.)
Then, attack the smallest debt first. Put any extra money you can get (by lowering your spending or upping your income or both) toward that debt. While you’re doing this, keep paying the minimum on the rest of your debts.
Once you’ve paid off the smallest debt, start on the second smallest. Take all the money you were throwing at your smallest debt and add it to the minimum payment of the second.
Once that one’s paid off, move to the next one, then the next, and so on until you’ve paid off everything.
Think of a snowball rolling downhill, gaining size and speed. You’re doing the same thing with your debt, knocking out each one—and getting crazy momentum and motivation as you go!
By starting with the smallest debt, you get quick wins early—and that gets you pumped to keep going until you’re totally debt-free.
And being totally debt-free is true debt relief.
Who Qualifies for Debt Relief?
The answer to who qualifies for debt relief depends on the kind of relief you’re talking about. Let’s quickly summarize each one.
Literally anyone can get financial coaching. A trustworthy financial coach does cost money. But you can get a free consultation with a Ramsey Preferred Coach if you want to see if the benefits will be worth it. (They usually are.)
To find out if you qualify for a debt consolidation path, you need to fill out an application with the new lender. They’ll take a lengthy look into your credit, debt-to-income ratio, total debt, income, total financial situation, identity, mortgage (if you have one), insurances and more. (Yeah, there’s no stone left unturned here.)
Based on their evaluation of all this, they’ll either approve you for the loan or not.
Oh, everyone qualifies for debt settlement. These companies really want your money. Remember, most of them take it and run, so they aren’t really worried about who they “approve.” As long as you can pay their upfront fees, they approve.
Student Loan Deferment
People currently in school, unemployed, in the military, getting cancer treatments, or in the middle of financial difficulties (meaning they’re unable to pay their bills—and can prove it) are most likely to qualify for student loan deferment.
Student Loan Forbearance
Student loan forbearance applicants must show they can’t cover their loan payments because of financial difficulties, medical expenses, a change in employment, or other reasons they can prove.
Student Loan Forgiveness
The three most popular ways to get student loans forgiven are if you teach at a qualifying school for a certain number of years, work at an approved public service job, or can prove permanent disability.
The main problem with banking on student loan forgiveness is that the nitty gritty details of who can and can’t qualify change often. So, you could work a job for five years that promises you student loan forgiveness in year six—but then the rules change, and you no longer qualify. This is one of the reasons actually getting your student loans forgiven is super rare.
Student Loan RefinancingTo qualify for a student loan refinance with our trusted partner, you need a degree, a minimum yearly income of $36,000, and a credit score of at least 660. And hear us when we say, we aren’t a fan of credit scores, but . . . if you’ve got student loans, you’ve got a credit score and should know how it affects your ability to refinance.
These are the basic requirements. Depending on your situation, there may be more.
If you have a mortgage, you probably qualify for a mortgage refinance. But remember, it's usually a better debt relief move for the long term than the short term. If you’re considering this option, get with a trustworthy lender to walk you through the details.
Answering the question of who qualifies for bankruptcy is complicated because there are six different types of bankruptcy—and each one works differently.
Basically, if you really aren’t able to pay back your debts (usually because of a job loss, struggling small business, divorce, medical emergency, death in the family), you may qualify.
However, we want to make it clear (again and again) that bankruptcy is freaking hard. Do what you can to avoid bankruptcy—it should be the last thing you try when you’re looking for debt relief.
Is Debt Relief a Good Idea?
This feels like a loaded question. Is having relief from your debt a good idea? Actually, it’s a fantastic idea. Right now, you might not be able to imagine that you could ever stop sinking and start swimming—that you could ever make real progress toward a debt-free life. But that life is possible.
Here’s the deal: Never go for a debt relief company or strategy that hands you bricks when you can barely stay afloat. Remember, debt relief comes in a lot of shapes and sizes, and most aren’t helpful.
Avoid anything that pushes back your payoff date or asks for a chunk of money upfront. That brings us to our next point.
Debt Relief Programs to Avoid
We already went deep into this when we covered the types of debt relief, so here are the highlights.
Debt Relief Programs to Avoid:
Debt Consolidation Loans
You’ll find yourself with a longer payoff date, extra fees to pay, and usually a higher interest rate. Sometimes you even have to put up your home or car for collateral—meaning you could lose them if you miss a payment!
Credit Card Balance Transfers
This debt “relief” comes with fees and a giant spike in interest if you make a late payment. Also, you end up with another credit card to deal with.
Home Equity Line of Credit
We can’t hate this one enough. A HELOC takes what you actually own in your home (the equity) and trades it for more debt. Plus, the bank can take your home if you default or misstep in any way.
Most debt settlement companies are a total scam. They charge you a fee and promise to negotiate your loans. Oh, and they tell you to stop paying your debts and pay them. Then they cut and run, leaving you in a horrible spot with your lenders because no one has been paying them.
Student Loan Deferment or Forbearance
These might feel like quick fixes—but they create a bigger problem in the long run because interest can build up the whole time the payments are on pause.
Student Loan Forgiveness
This is like aiming at a constantly-moving target because the qualifications change all the time, and the number of people who apply and actually receive forgiveness is super low.
Bankruptcy is a blow to your credit, your emotions, your finances . . . your whole world. Do what it takes to avoid bankruptcy and use it as a last resort only.
How Does Debt Relief Impact Your Credit?
Again, we’re all about living life without a credit score because it’s really just a debt measurement tool. But, if you’ve got debt, you’ve got a credit score, and you’re probably wondering how debt relief affects that. The answer depends on what kind of debt relief you’re talking about.
If you go the debt consolidation route, your credit score will suffer. Why? FICO is all about you consistently having debt (yuck) that you consistently pay on time. When you roll old debts into a new debt, you mess with that consistency, and your score takes a hit.
Also, any loan or credit card application requires what’s called a “hard inquiry” on your credit, which usually lowers your credit score.
Since most debt settlement companies trick you into skipping your debt payments, it’s pretty clear this will tank your credit score. (If debt settlement wasn’t painted as being the literal worst already.)
Bankruptcy brings a huge blow to your credit. It can stay on your credit report for up to 10 years. That makes future important financial moves (like buying a house) next to impossible until your debt history is cleared of that dark mark.
How Do Debt Relief Programs Make Money Off You?
When you read about the ways many of these debt “reduction” companies take advantage of people who are literally asking for relief in a hard time—do you get angry? Like, clinched-teeth, wanting-to-punch-a-wall angry?
And while we don’t actually punch walls (because it hurts), we do refuse to be silent about what these toxic companies are up to.
Some of them charge huge fees, have skyrocketing interest rates, encourage you to pay longer, tell you more debt is the answer to your debt problem, or straight-up lie—promising that they’ll take care of things when the only thing they take care of is running off with your money.
That’s how they get a profit—by setting terms (or telling lies) that are good for their bottom line, not yours.
Getting out of debt is a battle. Most debt relief companies say they’re on your side, but they’re actually taking you down from the inside.
But here’s some good news. A few of these guys want to fight your debt alongside you. Let’s finish by talking about that!
How to Get Debt Help That Works
If you’re asking, “What is debt relief?”, the first answer you’ll get is all the programs and strategies we’ve listed here so far. But the real answer is something totally different.
Feeling relief from your debt means not freaking out when an unknown number comes up on your phone because you’re afraid it might be a debt collector. It’s not dreading the words “insufficient funds” or “declined” when you swipe your card at the grocery store.
Ultimately, it means not answering to a lender—but knowing your money is answering to you.
If you’ve felt any of those weights (or some totally different debt pressure) know we see you. Know we’ve been there. And know there’s a way out. There’s a debt relief method that actually works and won’t pile on more debt or kick you when you’re down.
It’s not too good to be true. It does take hard work. But it’s worth it. And you can learn all about it—how to pay off your debt and find true relief (and even confidence!) with your money—inside a membership to Ramsey+.
No stuffy finance professors here. Just real-life money experts who want to throw you a life raft because they believe you can get out of this mess.
Hey, try it out at no cost. Jump into a Ramsey+ free trial and watch the first two lessons in Financial Peace University, our number one money course. You’ll see how real people really paid off their debt. They made it happen!
No more drowning. No more treading water. True debt relief is debt freedom—and you can make it happen for you.