What Is Debt Relief?

When you’re neck-deep 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, drowning in minimum payments and mounting interest charges.

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Take a deep breath and know this: There is hope. But there are also scammy companies ready to take advantage of your situation and your desperation 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 the different types, and clear up the confusion about which types are life preservers and which are cinderblocks. Plus, we’ll show you the proven method to ditch debt for good.

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, it’s because debt relief programs can cover a lot of things. From bankruptcy to consolidation to the full freedom of paying off your debt for good, debt relief comes in many shapes and sizes.

8 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. Frankly, most of them downright suck.

Here are the facts and challenges that come with each one. 

1. Financial Coaching

You might wonder why financial coaching is at the top of our list for debt relief options. Here’s the thing—whatever path you’re about to walk, it’s always super helpful to talk it out first with someone who knows this stuff.

When you get debt help from a financial coach, they’ll help you sort through your options, make sense of it all, and put you on the right track. You’ll get a clearer picture of where you stand so you aren’t so overwhelmed or get sucked into a not-so-well-intentioned debt relief service, which—as you’re about learn—is most of them.

Basically, if you’re in over your head and not sure what to do next, some one-on-one help could be the best place to start. That way, you can make progress on paying off your debt with a pro in your corner and confidence on your side.

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 you started 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.

And here’s our biggest beef with debt and credit card consolidation: They don’t fix the habits that got you into debt in the first place! Like we always say here at Ramsey, money isn’t a math problem—it’s a behavior problem. If you don’t tackle toxic money habits, chances are you’ll run up the balances again and owe on your consolidation loan!

More stress, zero real solutions—just another bill on your already full plate.

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 multiple federal student loans into one lump payment.

Consolidating your federal student loans for free through the government can be helpful—especially if you’re juggling multiple loans with variable interest rates. But consolidating won’t give you a lower interest rate overall (it’s just the average of the rates you already have). And it usually extends the length of your loan, which can cost you more in the long run.

So, student loan consolidation isn’t the right choice for everyone. But if you do go that route, you need to commit to paying more than the minimum payment. Otherwise, you’ll be in debt longer and lose way more money to interest!

But the other types of debt consolidation? Just say no! 

With debt consolidation loans, credit card balance transfers, and HELOCs, all you get are a bunch of red flags, like:

• Up-front charges, fees or closing costs
• Changing interest rates (because of late payments or the lender’s mood that day)
• Longer repayment periods that keep you stuck in debt
• More debt

Hopefully this peek behind the curtain reveals 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? It is.

These companies charge a fee for their “services,” often 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. Tax Debt Relief

Tax debt—or back taxes—is any money you owe the government in unpaid taxes. Now, owing tax debt can feel scary, and it’s not something Uncle Sam is going to forget about anytime soon. But if you do owe and don’t have the money to cover it now, you do have some tax debt relief options to explore:

Currently Not Collectible: If you feel like you’re in whirling storm of IRS letters, calls and emails, you might consider applying for Currently Not Collectible status. This pauses collection attempts for a while, giving you a chance to catch your breath and plan your next move. But keep in mind—the longer your balance sits, the more fees and penalties will pile up. Remember, this is a breather, not a solution.

Offer in Compromise: An Offer in Compromise is basically telling the IRS, “Look, I can’t pay the full amount, but I can give you this much right now—can we call it even?” Essentially, you’re offering what you have in hopes the IRS will settle your debt. Sound too good to be true? For most people, it is. Getting approved is insanely tough—the IRS digs into your income, expenses and assets to see if you really can’t cover your bill.

IRS Payment Plan: For most people, this is the best and simplest way to tackle tax debt. The IRS lets you pay what you owe over time through either a short-term or a long-term payment plan. Sure, you’ll still rack up some penalties and fees while the balance lingers, but it’s far better than ignoring the problem (pro tip: never do this!). And you’re at least chipping away at the debt—literally buying yourself time to pull together a lump-sum payment to knock it out for good.

Like we said, tax debt can feel overwhelming—but it’s nothing you can’t handle. If you’re feeling lost in Uncle Sam’s woods, a tax pro can help. They’ll guide you through the clutter of tax debt relief options so you can find the best path forward and start attacking that balance with confidence.

5. 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 43 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 your payments are paused. The interest gets stacked on top of what you already owe. Yeah—it’s not a good deal.

Forbearance is a pause or reduction of your student loan payments. Interest always builds up during forbearance—but you can decide to keep paying it, which is better than letting it grow and blow up your balance. Still, it’s not a good plan.

Forgiveness means having your student loans forgiven, canceled or discharged so you don’t have to repay some or all of your debt. Public Student Loan Forgiveness is the best-known path, with others like the Teacher Loan Forgiveness program or Disability Discharge also available. But here’s the catch—qualifying is crazy difficult. The process is complicated and actual approval is rare. Don’t bank on this option.

6. Refinancing

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.
• Stay motivated 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, refinancing could mean 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!  

7. Bankruptcy

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—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 bankruptcy.

Also, it’s expensive and stays on your credit report for a whopping 7–10 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.

8. 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 the same with this one. Are you ready? The only problem with the debt snowball is that it takes work.

But. It. Works. So, it’s worth it.

In fact, the debt snowball works so well that it’s a key part of Dave Ramsey’s 7 Baby Steps—the proven method that’s helped people save for emergencies, pay off debt for good, and build wealth, with decades of success to back it up.

Here’s a rundown of how to pay off your debt with the debt snowball:

• List your debts from smallest balance to largest (ignore the interest rates).
• Attack the smallest debt first. Put any extra money you can find (by lowering your spending, 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, take all the money you were throwing at it and add it to the minimum payment of the next smallest debt.
• 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 building 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?

Who qualifies for debt relief depends on the kind of relief you’re talking about. Let’s quickly summarize each one.

Financial Coaching

Literally anyone can get financial coaching. A trustworthy coach does cost money, but you can get a free consultation with a Ramsey Preferred Coach to see if it’s worth it. (It usually is.)

Debt Consolidation

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 deep look into your credit, debt-to-income ratio, total debt, income, overall financial situation, identity, mortgage (if you have one), insurances and more. (Yeah, there’s no stone left unturned here.)

Based on their evaluation, they’ll either approve or deny you for the loan. Oh, and if they deny you, you can look forward to your phone blowing up relentlessly over the next few months with more loan offers from random, somehow even shadier, lenders.  

Debt Settlement

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 up-front fees, you’re in.

Tax Debt Relief

Since there are a few ways to apply for tax debt relief, there’s also a specific set of qualifications you need to meet for approval (spoiler: payment plans are the easiest to get):

• Currently Not Collectible: If the IRS agrees that you can’t pay your taxes and basic living expenses right now, they might put your tax bill in Currently Not Collectible status, ceasing collection attempts for a time.²
• Offer in Compromise: The IRS takes a look at your income, expenses, assets (your stuff) and overall ability to pay—digging into your unique situation to decide whether paying your full tax bill would create an extreme financial hardship or simply isn’t possible.³
• Short-Term Payment Plan: You owe less than $100,000 in combined tax, penalties and interest, and you can pay it off in 180 days or less.
• Long-Term Payment Plan (Installment Agreement): You owe $50,000 or less in combined tax, penalties and interests—and you’ve filed all required returns.⁴

Student Loan Deferment

People who are 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 provable reasons.

Student Loan Forgiveness

The three most common ways to get student loans forgiven are teaching at a qualifying school for a certain number of years, working in an approved public service job, or proving 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 Refinancing

To qualify for a student loan refinance, 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’re not 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. 

Mortgage Refinancing

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.

Bankruptcy

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 or 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 up-front. 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:	Why:
Debt Consolidation Loans	You’ll find yourself with a longer payoff period, extra fees to pay, and usually a higher interest rate. Sometimes you even have to put up your home or car as 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.
Debt Settlement	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 creditors and pay them instead. 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 very few people who apply actually receive forgiveness.
Bankruptcy	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 it. 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) and paying it 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 payments, it’s pretty clear this will tank your credit score. (As if debt settlement needed another reason to be the literal worst.)

Bankruptcy delivers a huge blow to your credit. It can stay on your credit report for up to 10 years. That makes important financial moves (like buying a house) next to impossible until your record is cleared.  

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, clenched-teeth, wanting-to-punch-a-wall angry?

We do.

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, drag out your payments, tell you more debt will fix 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 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. (You know that rule about not inviting vampires into your home? Yeah, that applies here.)

But here’s some good news: A few of these guys actually 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 out here for you. But that’s not really what you’re asking, is it?

Feeling relief from debt means not freaking out when an unknown number pops up on your phone because it might be that relentless debt collector again. It means not dreading the words “insufficient funds” or “declined” at the grocery store checkout. It means not having to think about money every other second because you’re carrying around a nagging debt gremlin on your back everywhere you go.

Ultimately, debt relief means not answering to a lender—instead, knowing your money answers to one person: you. And the best way to take back control? The debt snowball. It’s not fancy. Heck, it’s not even fast.

But you know what? It works. Every. Single. Time.

And since you already know what the debt snowball is all about (and why we love it so much), we’ll cut right to the chase. To get the snowball rolling, you need a budget. One more time for the people in back: You need a budget!

A budget is a plan for your money that puts you in the driver’s seat. A budget creates accountability and gives you permission to spend (minus the guilt or uncertainty). And most of all, a budget is how you reach all your money goals—including knocking out all that debt for good.

That’s where the EveryDollar app comes in. EveryDollar is the easy-to-use zero-based budgeting app that helps you take control of your money and keep tabs on it at a glance. It walks you through every step, including how to give every dollar a job each month and how to set up your debt snowball.

If debt relief is your destination, a budget is your roadmap—and EveryDollar is the car that’ll get you there. If you’re ready to start knocking out debt with intensity, download the EveryDollar app today and take the first step.