Pros and Cons of Debt Relief: Should You Use Debt Reduction Services?

Written By
G. Dautovic
July 05,2023

The average American debt, statistics inform us, is on the rise. And while there is no lack of options that promise people to get their finances back on track, most of them are advertised as magical cure-alls that don’t inspire a lot of trust. Can they really be as great as they seem? 

The answer to this question isn’t a straightforward “Yes” or “No”, which is why you should carefully weigh the pros and cons of debt relief before you decide if it’s right for you.

What Is Debt Relief?

Before we go into the specifics, let’s clarify what exactly debt relief is. Debt relief refers to measures that a borrower takes to reduce or refinance their debt through working with creditors or other third parties. It can entail a number of outcomes, such as the total or partial forgiveness of the debt principal, the lowering of the loan’s interest rate, consolidating debt, or extending the term of the loan.

Anyone, as long as they are highly indebted, can seek out debt relief - individuals, small and large businesses, municipalities, and even nations, but whether they should or not resort to this is a different matter.

Types of Debt Relief

Since the pros and cons of debt relief depend on the type of debt relief, we’ll look at the different types separately, as well as the benefits and downsides that come with them.

Debt Consolidation

Debt consolidation is a form of debt refinancing where you take out one big loan to pay off several smaller ones. There are two ways you can go about this. The first one involves getting a balance transfer credit card, which usually has a low or no interest rate, while the second one entails looking for lenders that specialize in credit card debt consolidation or debt consolidation in general. These card issuers and lenders typically offer better debt relief options than their standard counterparts.  


  • Fewer monthly payments: The main goal of debt consolidation is to have a single monthly payment, which simplifies your budgeting and reduces the chances of you missing a payment.
  • Better interest rates: If you have a solid credit score, you should take advantage of it and take out a loan with a lower interest rate.
  • Repaying debt sooner: By obtaining a debt consolidation loan with a short payoff term, you could become debt-free a lot faster.
  • Credit score improvement: As we’ve already mentioned, if you choose this debt solution, you’ll be more likely to make on-time payments. In addition to that, consolidation could potentially improve both your credit utilization ratio and credit history.


  • Higher rates: Borrowers who have a relatively poor credit score may end up with a debt consolidation loan that has a higher interest rate than the one(s) they are currently paying. Interest rates can also be influenced by the amount that you wish to borrow as well as the term length, so make sure you do the proper calculations in order to determine if debt consolidation would suit your specific financial circumstances.
  • Credit score drop: When discussing the pros and cons of debt consolidation, we also must mention that opening a new account has a slight negative impact on your credit score.
  • Upfront costs: Some loans for debt consolidation come with balance transfer, loan origination, closing, and annual fees. Late and at times even early payments may be fined as well. To avoid paying more than what you expected, carefully examine the fine print.
  • No financial education: Consolidating your debt doesn’t mean all your financial troubles are solved, which is why the fact that this type of debt relief doesn’t come with any financial education puts you at risk of making the same mistakes as before.

Debt Settlement

To settle debt, you need to get a lender to agree to forgive a part of your debt in exchange for making a large, one-time payment toward your existing balance. In the best-case scenario, you could end up having to return 50% to 70% less. Once the negotiations are over and you’ve successfully managed to persuade the lender to write off a portion of your owed sum, the exact conditions of the settlement will be put into writing.

Not everyone feels comfortable talking to creditors, and oftentimes, creditors won’t budge unless specific tactics are applied. In such situations, looking into debt settlement companies might be a good idea.


  • Saving money: An obvious benefit of settling your debt is that you’ll end up paying less in the long run.
  • Avoiding bankruptcy: One of the main reasons why people choose to enter into negotiations with their creditors is because they want to avoid bankruptcy. Bankruptcy stays on your credit report for quite a long time. It may cause you trouble even once it has been removed since many lenders and employers tend to ask if you’ve ever filed it. 
  • Paying off debt faster: It’s estimated that this kind of debt relief program could help you pay back your debt in approximately two to four years. With debt consolidation, for example, you may need three to five years to get your finances in order.


  • Credit score impact: You may be encouraged by the company handling the negotiations with your creditors to stop making your debt payments in order to save enough money to pay settled debts. However, if your creditors refuse to cooperate, the missed payments will show up as delinquencies on your credit reports. According to the Center for Responsible Lending, this could cause your credit score to drop 60 to 100 points. 
  • Rarely possible: Not all creditors are willing to enter into debt negotiation. For them to consider it, the risk of one of their borrowers defaulting on their loan has to be very high. High enough that they predict that there is no chance of them getting all of their money back, plus interest, in which case they would be better off accepting at least a part of the sum.
  • Taxes: You might not know this, but the part of your debt that is forgiven could still be considered taxable income, which decreases the amount of money that you might have been planning to set aside.
  • Fees: If you hire a debt settlement attorney or company instead of negotiating yourself, you’ll be charged a fee for their services - usually between 15 and 25% of the original debt.
  • Getting sued: In the event that your attempts to settle your debt fail, creditors may increase their collection efforts and in some cases, they might even sue you.

Debt Management Plan

A debt management plan is a debt repayment program typically offered by nonprofit credit counseling agencies. A credit counselor will contact creditors on your behalf in an attempt to get them to lower your payments and interest and help you with developing a budget based on your income and expenditures.  

Once your chosen debt management company has reached an agreement with the creditors, you pay it one regular monthly payment, which it then distributes to your creditors.


  • Set timeline: Unless anything unexpected happens, under a debt management plan, you should be able to pay off everything you owe within five years.
  • Single monthly payment: A debt management plan enables you to have one of the main perks of debt consolidation without having to take out a new loan.
  • Better terms: Creditors are often willing to improve your loan terms, especially if the debt management companies present them with a fair offer.
  • Educational resources: While enrolled in a debt management program, you’ll have access to financial experts who can help you develop healthy financial habits.
  • Credit score boost: It may not happen right away, but as you keep following the plan formulated by your counseling firm, you should see a gradual rise in your credit score.


  • Monthly fee: Some debt management agencies charge a fee for their plans, which is usually around 17% of the monthly payment.
  • No credit cards or lines of credit: To avail yourself of debt relief services, you’ll have to stop using your credit cards or even close existing ones. You also won’t be able to request any new cards or open any new lines of credit.
  • Not all creditors will cooperate: If some of your creditors refuse to reduce your interest and/or monthly payments, the debt management plan will be less effective.
  • Takes longer than other methods: Although it’s a safer option than debt consolidation or settlement as it involves less risk of falling into old spending habits and it doesn’t entail opening a new account, someone in a rush to reduce their debt might not be satisfied with the five years they’ll have to wait to accomplish that goal.


Bankruptcy is usually the very last option people resort to. It’s a legal process that begins with you filing a petition for one of the two main types of bankruptcies. After that, your assets are evaluated and, in most cases, used to repay a part of your outstanding debt. Some debts which are not paid are forgiven.

The two types of bankruptcy we’ve mentioned, which are referred to by their chapter in the US Bankruptcy Code, are Chapter 7 and Chapter 13. Chapter 7 is quicker and it may entail more debt forgiveness. Individuals who can’t qualify for Chapter 7 bankruptcy because their earnings are too high, can file under Chapter 13, which allows them to create debt repayment plans.


  • Automatic stay: Once you file for bankruptcy, an automatic stay will go into effect. It prevents creditors from pursuing payment or taking other actions against you. The automatic stay can also protect you against situations such as foreclosures and evictions.
  • Lack of contact with creditors: After your bankruptcy has been filed, the court will appoint a trustee to you. The trustee will then act as an intermediary between you and your creditors. If you file for Chapter 13 bankruptcy, the representative will be in charge of receiving and processing your payments as well.
  • Forgiveness of debts: Filing for either of the two bankruptcy chapters can result in a part of your debt being written off.
  • Fresh start: Bankruptcy can allow you to start your financial life all over again without any debt weighing you down.


  • Losing assets: Filing for Chapter 7 bankruptcy may mean that you’ll have to give up some of your assets. 
  • Service and court fees: Filing for bankruptcy isn’t free. According to the American Bankruptcy Institute, you’ll most likely have to pay between $1,300 and $1,400 for a Chapter 7 bankruptcy case, while a Chapter 13 bankruptcy usually costs around $1,800.
  • Not everything is forgiven: Debt cancellation isn’t applied to student loans, certain taxes, child support, fines, and any liabilities that were the result of fraud.
  • Affects your family and friends: If you have joint or co-signed accounts, creditors may request payment from the non-bankrupt party.
  • Long process: The entire Chapter 13 bankruptcy process could take up to five years.
  • Future financial difficulties: Bankruptcies are made public, which means that your future potential lenders, employers, and landlords will be able to gain access to this information quite easily. Consequently, even if you qualify for a loan, you’ll be offered higher interest rates and lower credit limits. Additionally, this type of debt resolution strategy may also cost you your job or house.
  • Long-lasting credit score impact: Bankruptcy lowers your credit score significantly and it remains on your credit reports for years. Chapter 13 bankruptcy will stay on your credit file for seven years, while Chapter 7 bankruptcy won’t be removed from your credit reports for 10 years.

No Ready-Made Solutions to Debt

Whether or not you should use debt reduction services or any form of debt relief depends solely on the severity of your financial circumstances. However, before you make any definitive decisions, you might want to consult a financial expert first – for example, many credit repair companies offer one free consultation to their non-customers. 

Aside from that, make sure you carefully examine the pros and cons of debt relief that we’ve discussed in this article because you should always know exactly what you’re getting yourself into, especially when it comes to something as serious as your finances.


What should you not say to debt collectors?


There are a few things that you should, under no circumstances, say to your creditors. First of all, answer their question honestly, but don’t give them any more information than you absolutely have to. Secondly, don’t give them access to your bank account. Finally, you mustn’t tell them about any non-essential payments or purchases.

If you don’t feel comfortable communicating with creditors, you could seek out the help of debt relief services and have one of their representatives do it on your behalf.

What happens after 7 years of not paying debt?


If you don’t pay your debt for seven years, it’ll most likely be recorded as a delinquency on your credit reports, which typically lowers your credit score. Some lenders might even hand your debt over to a debt collector or a collection agency, and, if they feel it’s necessary, your creditors might even file a lawsuit against you. Also, you should know that in situations when a person defaults on a secure debt, their property gets repossessed.

How long does debt relief stay on your credit report?


Most types of debt relief, such as debt settlement, remain on your credit reports for seven years. However, something as severe as bankruptcy can stay in your credit file for even longer.

What are the cons of debt relief?


The downsides of debt relief vary depending on your chosen method of dealing with the debt. Most commonly, they include a drop in your credit score, fees for using a debt reduction service, aggressive debt collection efforts from your creditors, worse loan terms in the future, and potentially repeating your past financial mistakes since most of these debt solutions don’t come with any kind of counseling.

Read our article on the pros and cons of debt relief if you’d like to know more about this topic.

About author

I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.

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