Girl looking into debt relief programs at coffee shop.

Do Debt Relief Programs Work?

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Struggling to make your credit card payments each month? Maybe you’re falling behind on medical bills or personal loans. A debt relief program could help.

Be careful, though: Debt relief programs, which come in a wide variety, are not free. They also might not work for you. And participating in these programs could severely damage your credit if not used correctly.

Are Debt Relief Programs a Good Idea?

Should you consider a debt relief program? In short, maybe.

If you’re struggling to pay your bills on time each month, or if your credit card debt keeps growing, you might consider a debt relief option. If you’re missing payments or running up credit card debt, you’ll cause your credit score to fall.

That’s a problem. Lenders and creditors rely on this number when determining who qualifies for a loan or a credit card and at what interest rates. If your credit score falls too much because of your debt problems, you might not qualify for new loans or credits. Even if you do, they might come with a high interest rate.

Debt relief programs, then, might give relief and help you recover from a low credit score.

Do Debt Relief Programs Work?

Success with a debt relief program depends on your determination and circumstances. Sometimes people miss their new monthly payments, causing further damage to their credit scores. Others might apply for debt consolidation loans – which combine existing debts into a loan with one payment – and get rejected.

Still others might apply for debt settlement, in which creditors forgive or reduce the amount they owe, only to find that creditors and lenders aren’t interested in negotiating.

Debt management programs may also charge fees. This is fine if the fee is reasonable and you don’t mind paying for a financial professional’s help. But know that you can do much of the same work that a debt-relief specialist does on your own. For instance, you can draft your own household budget to find out how much you can afford to spend each month to pay down your debt. You can then make those extra payments on your own, without having to pay a fee to anyone else.

If you’re interested in outside help, though, here’s a rundown of some of the debt relief options available to you and the impact these plans might have on your credit.

1. Debt Management Plans

If your monthly debts have become a burden, and you’re worried that you won’t be able to make your payments each month, working with a credit counseling agency to set up a debt management plan might be a more hands-off solution.

Under such plans, a credit counseling agency – you can find them through the National Foundation for Credit Counseling – will study your finances to decide how much you can afford to pay each month on your debt. This agency will then draft a plan in which you pay this amount to them each month. The counseling agency will then use this money to pay your creditors.

Before setting up a debt management plan, the credit counseling agency will contact your creditors to inform them of the plan. These agencies might also negotiate a lower interest rate on your debt or a lower monthly payment.

Be aware, though, that debt management doesn’t work with all debts. It only works well with un-secured debt, which is debt that doesn’t have a car or house as collateral. You can use a debt management plan, then, to pay off your credit card debt, medical debt or unsecured personal loans. You can’t use it to pay off auto loans or mortgages. Keep in mind student loans also aren’t covered by debt management plans.

2. Debt Consolidation

You might also work with a debt consolidation company or other lender to gain relief from your debts. This company will give you a single debt-consolidation loan, with a fixed payment plan. You can normally see what you’d qualify for without impacting your credit score.

You use the money from this loan to pay off the rest of your debts. You’ll then make regular monthly payments on this loan until it’s paid off.

The benefit here is that you are combining your debt and now making just one monthly payment instead of several. This can make it easier to manage your debts. The negative? You’re still paying the same amount of money (although, hopefully at a lower interest rate). Your debt is not reduced, it’s just combined into one simple payment.

You’ll need to make your payments on time, too. If you are 30 days or more late, your credit score will fall. A late payment will also remain on your credit reports for seven years.

3. Debt Settlement

Here, you’ll work with a settlement company that will negotiate with your creditors to settle your debt. The hope is to get these creditors to either reduce or, if you’re fortunate, forgive your debt. You then pay back your newly negotiated debt amount.

The problem is that many of your creditors might not agree to reducing your debt. There’s no guarantee that a debt settlement company will be able to negotiate a better deal for you. These companies will also charge fees that you’ll have to pay regardless of the outcome.

Debt settlement will also drag down your credit score and will stay on your credit reports for seven years.

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How Do You Qualify for Debt Relief?

There's another challenge with debt settlement: Most creditors won't agree to negotiate until your debt has already been sent to a collection agency. As Lawrence Duffany, a financial coach in Thomaston, Connecticut, says, this means that significant damage has already been done to your credit score.

If you do work with a settlement company, Duffany recommends that you get all settlement offers in writing and only agree to the settlement if you know you'll have the money to pay the amount in full.

It's also important to research debt settlement or management companies before you work with them, Duffany said. There are plenty of companies that will take your money and do little to resolve your problems, he says. "Most debt management programs are not worth what they are paid for.”

How Does a Debt Relief Program Affect Your Credit?

The impact a debt relief program has on your credit will vary depending on the type of program.

Debt management plans have the smallest impact on your credit scores. When you agree to a debt management plan, it gets on your three credit reports, one each maintained by the national credit bureaus of Experian™, Equifax® and TransUnion®. Though, this shouldn’t cause your credit score to fall. A notice of a debt management plan should get listed as a neutral event.

But other factors associated with a debt management plan could cause your credit score to fall. As Experian says, you might be asked to close credit card accounts. That could hurt your credit-utilization ratio, causing your credit score to drop. Also, your credit score will rise if you pay down your debt. If you pay down your debt more slowly, that could prevent your score from rising as quickly as you might like.

Simon Nowak, chief executive officer of in the New York City area, says that debt management plans can simplify your life. After all, you are now making one payment to a credit counseling agency instead of many to several creditors.

A potential negative, though, is that notice on your credit reports showing third-party help. It's true that it won't hurt your credit score. That doesn't mean, though, that this won't cause you problems down the road, Nowak says.

"Any potential creditors who see that might hesitate to approve you," Nowak says.

Credit bureau Experian says that debt settlement will cause your credit score to fall. Notice of a debt settlement will also stay on your credit reports for seven years.

A debt consolidation loan should not affect your credit score. However, if you make a late payment on this loan, this will continue to hurt your score.

Filing Bankruptcy as Last Resort

If you’ve investigated other forms of debt management, and none of them will work for you, you might consider bankruptcy. Know, though, that filing for bankruptcy protection should be your last resort. It will devastate your credit and stay on your credit reports for many years.

Filing for Chapter 13 bankruptcy protection, where a bankruptcy judge creates a repayment schedule that allows you pay back your debt at a pace you can afford, could cause your credit score to fall by 100 points or more. It will stay on your credit reports for seven years.

Creditors and lenders, then, will see this financial misstep when you apply for a loan or credit card during this time. It might dissuade them from approving you for a car loan, mortgage, personal loan or new credit card.

Chapter 7 bankruptcy – in which most of your debts are forgiven – is even more damaging. It, too, will cause your credit score to fall by 100 points or more. Unlike Chapter 13 bankruptcy, though, a Chapter 7 filing will stay on your credit reports for 10 years.

Kristine Stevenson Seale, a financial coach with Temple, Texas-based Advocate Financial Coaching, says that the biggest drawback of bankruptcy is that filing for it won't guarantee that your money problems are behind you.

"A lot of bankruptcy filings boil down to poor behavior choices with money," Seale says. "What will keep you from filing for bankruptcy again?"

The key, then, to making debt relief options work is your motivation to make changes in your spending habits. If you can do this – and you can gain control of your spending – debt relief could point you toward a happier financial future.

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