How to Avoid Choosing the Wrong Debt Relief Program

Nadav Shemer
Avoid debt consolidation scams
Debt consolidation, debt settlement, debt management, debt negotiation, credit counselling, bankruptcy. With so many terms thrown around, it’s no wonder debt relief is such a confusing space.

The best type of debt relief depends very much on the individual. Where debt consolidation might be sufficient for one person, another might have no choice but to declare bankruptcy. 

From a consumer point of view, the problem isn’t the number of choices but the lack of clarity around what each of these choices means. The best way to avoid choosing the wrong debt relief program is to get educated. It is critical to learn the difference between each type of debt relief and read the fine print before agreeing to one debt relief program or another.

Understanding the Difference Between Debt Relief Programs

Most debt relief providers specialize in only one type of debt relief, but many of these specialists advertise all types of debt relief. Needless to say, this can be confusing. It’s a bit like walking into an optometrist clinic and finding information for optometrist, ophthalmologist, and orthoptic services, even though the clinic only offers optometrist services.

If a company doesn’t clearly state which type of debt relief it deals with, how can you as a consumer know? Reviews of debt relief providers are always a good starting point. Understanding the different types of debt relief can also help you understand what you’re looking at when you land on a debt relief provider’s website.

Debt consolidation

  • Top pro: Consolidates multiple cards into one loan with one monthly payment

  • Top con: Minor damage to credit score in short term

Involves consolidating multiple debts such as credit cards or student loans into a single loan with a single monthly payment. With a good credit score and the right lender, debt consolidation can help you pay off your debts at a reduced interest rate and reduced monthly payments. Debt consolidation can cause slight damage to your credit score in the short-term. If you pay off your new loan in time, your credit score should improve in the longer term.

Debt management

  • Top pro: Involves new payment terms with manageable monthly payments 

  • Top con: Forced closure of other credit accounts

Commonly advertised as debt negotiation or credit counseling. When a company offers you a debt management program, what this means is they negotiate with your creditor to get you a lower interest rate or longer term. In both cases, the result is a reduced monthly payment, making it easier to pay off your debt. Debt management usually requires forced closure of credit accounts, which damages your credit score. If the program involves partial repayment (like a debt settlement), this also damages your credit score. In the long term, paying off the loan under the new terms can help rebuild your credit score.

Debt settlement

  • Top pro: Creditor agrees to forgo part of the debt

  • Top con: Stays on credit score for 7 years

Involves having a company negotiate with your creditors to get them to agree to partial repayment. A debt settlement is usually only an option if the debt is unsecured, like most personal loans, because the creditor can’t seize any assets and may therefore believe partial repayment to be their best option. Debt settlement can cause severe damage to your credit score, and it stays on your credit report for up to 7 years.


  • Top pro: Restructures or eliminates debts

  • Top con: Stays on credit report for 10 years, loss of non-exempt assets, appearance before judge

Bankruptcy is really only an option if you have exhausted all other options. Bankruptcy involves a mandatory appearance before a judge or trustee and loss of non-exempt assets like investment properties. It can remain on a person’s credit report for up to 10 years, making it difficult to borrow or refinance.

Understanding How Debt Relief Providers Make Money

Just like any other service provider, debt relief providers charge money for their services. You wouldn’t expect them to offer their services for free, but understanding how they make their money can help you avoid the wrong debt relief program. 

A debt consolidation loan is basically like any other personal loan, except that the purpose is to pay back all your creditors. This type of loan can be obtained directly from a lender or facilitated by a debt relief company. A debt consolidation loan should involve the same types of charges usually associated with a personal loan. This includes an interest rate and certain other fees such as origination fees. These days, lenders are increasingly waiving the origination fee and generating revenue primarily off the interest rate. Of course, late payment penalties usually apply if you fail to make monthly payments on your debt consolidation loan.

In the case of debt management and debt settlement, (and bankruptcy, although that’s a completely different ball game), the provider usually takes a cut. Let’s say you get a debt settlement provider to negotiate a partial repayment with your creditors. You previously owed $20,000, but your debt settlement company convinced your creditors to forgo half the debt. Your saving would be $10,000. The debt settlement company would take a percentage, usually around 15%-25%, or in this example $1,500 to $2,500. 

Yes, debt management and debt settlement are not cheap, and they have other consequences such as damage to your credit score. For that reason, it’s best to only go for those types of programs if you’ve exhausted all other options. In some cases, debt settlement may be your only choice. But be wary of companies that seem too eager to push you into a debt settlement before you’ve explored better options like debt consolidation.

Understand What You’re Getting Into

It can help to picture debt relief on a sliding scale where debt consolidation is the best option, then debt management, debt settlement, and finally bankruptcy after all other options have been exhausted. 

If you understand the magnitude of your debt situation, as well as the pros and cons of each type of debt relief, you won’t be easily conned or misled into the wrong type of debt relief.

As with any type of consumer service, comparing debt relief providers is essential to finding the best one for you.

Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products.