Explore debt relief solutions so you can find the right path to get out of debt.
When debt takes over your budget, it usually becomes an all-consuming force that lets you focus on little else. It’s impossible to focus at work, you can’t sleep, and you’re high on stress and low on patience. You need a workable solution. You need debt relief.
But what relief programs are available for the types of debt you hold? And what’s the best option for your financial situation?
8 debt relief options
Option 1: Deferment
This relief option allows you to temporarily suspend debt payments. With the lender’s approval, you delay the repayment schedule without incurring penalties. You also avoid creating negative items in your credit report that can decrease your score.
During deferment, interest charges still accrue on your debt except in specific circumstances. For instance…
- If you have a subsidized federal student loan, you defer the payment until you leave school and the government pays your interest charges.
- On the other hand, if your loans are unsubsidized then the payments are deferred but interest charges accrue. This means the amount you owe increases as you go through school.
Deferment is most common on student loans. However, deferment on other types of debt is possible, subject to lender approval.
Option 2: Forbearance
This solution is similar to deferment. The lender agrees to reduce or suspend monthly payments entirely. Forbearance periods are generally shorter than deferment periods. Forbearance is typically granted by a lender if you contact them at the beginning of a period of financial hardship. If you anticipate that you can’t make your payments, you can request forbearance BEFORE you fall behind.
This type of debt relief is usually used for student loans and mortgages. Unlike in deferment, interest charges almost always accrue, even with subsidized federal student loans. However, it’s usually easier to qualify for forbearance. This can also work for other types of debt, including credit cards.
Option 3: Refinancing
While deferment and forbearance change your payment schedule for a period of time, refinancing permanently changes your loan. The primary goal is to lower the interest rate applied to your debt. It may also provide other benefits in some circumstances, such as lower monthly payments.
Lowering the interest rate applied to your debt allows you to save significant money over the life of your loan.
- You can refinance mortgages auto loans and private student loans, qualifying for a new rate based on your credit score. When you refinance a mortgage, keep in mind that
- For federal student loans, refinancing is available; however, the interest rate for federal loans is always based on a weighted percentage of the 10-year Treasury Note index.
- If you lower the interest rate on a credit card, this is known as interest rate negotiation and no refinancing. Refi only applies to closed debts.
Option 4: Modification
Loan modification permanently changes the terms of a lending agreement. While refinancing reduces the interest rate, modification can change the principal loan amount or the length of the loan (term). You can also switch from an adjustable interest rate to a fixed rate. In most cases, you modify a loan to better match your needs as a borrower and to achieve lower payments.
The most common type of loan that you modify is a mortgage. If your home is worth less than your remaining mortgage balance, modification matches the principal to the property value. Modifications were common after the mortgage crisis in 2008. However, as of January 1, 2017 the federally subsidized modification program HAMP ended. That means modifications are much less common now.
Option 5: Consolidation
Debt consolidation is the process of combining multiple debts into a single monthly payment in a new loan or line of credit. Instead of worrying about multiple bills to pay, you only have one payment to cover each month.
You use consolidation to accomplish one or more of the following goals:
- Lower monthly payments
- Lower interest rate
- Simplified repayment schedule
Debt consolidation is typically used for credit card debt and student loan debt. You must consolidate each unique type of debt separately.
For student loan debt, a Direct or FFEL can be used to consolidate federal student loans as long as you have at least one loan of each type. There are also private consolidation loans that can be used for private student loans.
For credit card debt, you can use a debt consolidation loan or you can consolidate debt using a balance transfer credit card. With the card, the goal is to pay the debt you consolidate off before the 0% APR introductory period ends.
Option 6: Repayment plans
A repayment plan is used to permanently adjust the payment schedule for a debt, but it does not modify the loan. Instead, the repayment plan replaces the loan repayment schedule. This is primarily seen with federal student loan debt and tax debt, with one specialized solution for credit card debt.
- The federal government offers repayment plans that allow you to restructure the payment schedule on one or more of your government-backed student loans. The fact that you can use a federal repayment plan to adjust the schedule for multiple loans makes this also similar to consolidation. The plans have a set term and help you accomplish various goals. You can get lower payments if you have a limited budget or accelerated payments to minimize interest charges.
- For tax debt, an installment agreement repays one or more years of back taxes in a way that works for your budget.
- For credit card debt, if you can’t consolidate due to a bad credit score or excessive debt, you can enroll in a debt management program through a credit counseling agency. It acts like a form of consolidation, however the program is not a loan you take out through the agency. They simply act as a go-between to arrange a repayment schedule with your creditors. You still owe your creditors the individual debts.
Option 7: Settlement
Debt settlement is the most damaging option for your credit. In fact, when used correctly none of the other options should negatively impact your credit score. At most, they will have a neutral effect on your credit; some can even improve your score. By contrast, debt settlement almost always leads to credit damage.
Settlement works exactly as it sounds – you settle a debt with the lender or creditor for less than the full amount owed. These are the, “Solve your debt problems for pennies on the dollar” relief offers you hear advertised.
This relief option can be used for credit card debt, tax debt, and private student loans. Federal student loan debt cannot be settled (for the record, it’s also extremely difficult to discharge during bankruptcy). Mortgages aren’t usually settled either; although you can short sale where you sell the home for less than the remaining balance on the mortgage.
Debt settlement takes careful negotiation, as most lenders’ initial reaction would be to say no.
- The IRS rarely excepts tax settlement unless you can show there’s no reasonable way they can expect to collect the full amount.
- Private student loans can be settled, but they can’t be easily discharged during bankruptcy either. This means lenders have little incentive to settle.
- For credit cards, your debt usually has to be in third-party collections before settlement becomes a viable option.
Option 8: Forgiveness
Loan forgiveness (also called debt forgiveness) means your debt is cleared without penalties. It’s a full discharge that doesn’t require you to make a full or partial payment. If you meet the forgiveness eligibility requirements, then any remaining balance on a debt is forgiven without any credit penalties.
As you can imagine, this is pretty rare. The most common type of forgiveness applies to federal student loan debt. But you must be in the military or in a public service sector position, such as nursing or teaching, to qualify.
There is tax debt forgiveness, but only in the case you can prove you are not legally responsible for the debt. This happens in Innocent Spouse status cases, where you prove your spouse incurred tax debt without your knowledge.
The best relief options for different types of debt
Credit card debt
The primary relief options used for credit cards and other unsecured debts are:
- Debt consolidation
- Repayment plans (debt management program)
- Debt settlement
In some cases, you can negotiate with a creditor directly to ask for deferment or forbearance. You must be current with your payments for this to work. If you’re already behind, it’s unlikely the creditor will accept.
Interest rate negotiation isn’t usually used strictly as a relief option, although lowering the rate reduces your monthly payments. The payment reduction is usually not enough to provide real debt relief. In most cases, negotiation is used to minimize cost when your finances are stable.
Student loan debt
Thankfully there are a wide range of relief options available for student loan debt. That’s important, since as mentioned above student loans can’t easily be discharged during bankruptcy. That makes relief programs critical.
- Deferment and forbearance are both available for federal student loans; private loans would be subject to negotiation with individual lenders.
- You can refinance both types of loans. Just keep in mind on federal refinancing, your credit score doesn’t come into play. If the rate set on June 1 of each year based 10-year treasury index is not better than your original rate, you can’t use this. Private loan refi depends on your credit score.
- Debt consolidation applies to both types of debt. But you can only use federal consolidation loans for federal loans. Private consolidation loans can be used for both; however, be warned this converts federal loans to private. You may lose eligibility for repayment plans and forgiveness if you do this.
- Repayment plans apply for federal student loans only.
- Federal student loan debt is also eligible for forgiveness if you have a career in a qualifying public service or military position. You must be enrolled in a hardship based repayment plan and forgiveness occurs after 120 payments (10 years).
Back taxes to the IRS can also be particularly damaging. You can’t discharge tax debt through bankruptcy, it leads to liens and levies, and they can garnish your wages.
- Instead of deferment or forbearance, you can file for Currently Not Collectible (CNC) status with the IRS. This delays repayment until you have the means to make payments in a way that doesn’t cause financial distress. The IRS reviews your situation regularly to determine when you can start payments.
- Repayment plans called Installment Agreements (IAs) are the most common type of tax debt relief. If you owe less than $5,000 you can even apply on your own through the IRS web portal with a Simple IA.
- Tax debt settlement requires a thorough review of your finances and situation. The IRS must acknowledge that there is no reasonable expectation for full repayment in order to settle
- Proving Innocent Spouse status is one the few ways to qualify for tax forgiveness
If you’re struggling with a mortgage or second and third mortgages, you generally have one of two goals:
- Home retention – i.e. you get to stay in the home
- Graceful exit – you vacate the property and get out of the mortgage in the least damaging way possible
For home retention:
- You can use forbearance to delay or suspend your payments. The lender will expect you to return to the original payment by a certain date. The lender can also require that you make catch up payments.
- Refinancing is common because it can reduce the monthly payments along with the interest rate. There is even a government program still running following the mortgage crisis that subsidizes refi agreements: HARP (Home Affordable Refinance Program).
- Mortgage modification is still possible, subject to negotiation with your lender. However HAMP (Home Affordable Modification Program) ended at the start of 2017, so lenders are less likely to offer modification.
For a graceful exit, most relief options are unique to mortgages:
- Short sales mean you sell the home for less than the remaining balance on the mortgage. Just be careful; even with an approved short sale, the lender can seek a deficiency judgment in civil court for the balance owed.
- Deed-in-lieu of foreclosure (DIL) means you transfer property ownership back to the lender. This releases you from remaining monthly payments.
- Cash for Keys is where the lender agrees to pay you to vacate the home in a timely fashion. You must maintain the property in good condition and leave as scheduled. Lenders offered this option during the mortgage crisis through the Home Affordable Foreclosure Alternatives (HAFA) program.
- Deed-for-lease is another way to return ownership to the lender. However, you become a renting tenant in the property. You do a DIL first, then sign a lease.
Auto loans and other loans
The primary form of relief for an auto loan or personal loan is to refinance at a lower interest rate. This would typically reduce the monthly payments to make the loan more affordable. In some cases, you can also use loan modification. This is usually used to extend the term which, in turn, lowers the monthly payments.