Debt Relief Programs Compared

Zero in on the right relief option for your debt and financial situation.

Debt relief programs refer to any solution you can use to overcome financial challenges caused by debt. The best program to use largely depends on the types of debt you hold and your overall financial situation. Essentially, the right relief option to use in one situation may not be the best in another. So, you need to find the right program for your unique financial situation.

The information below helps you understand the various debt relief options available. We explain how each solution works and which types of debt it works best to address. If you still have questions or would like an expert evaluation of your situation, we can help. Call Consolidated Credit at 1-844-402-3073 to speak to a credit counsellor.

8 options for debt relief

Option 1: Deferment

This relief program temporarily pauses the payment schedule on your debt. You delay the monthly payments until you have the means to pay what you owe. Interest still accrues on the debt. However, you avoid penalty fees and credit damage caused by missing payments.

Best for: This is primarily used for federal student loans. If you have subsidized federal loans, the government even covers the interest charges during deferment. It can also apply to other types of loans, but must be negotiated on a case-by-case basis with your lender.

Option 2: Forbearance

This relief option is like deferment. You can suspend the monthly payments during a period of financial distress where you are unable to pay. In some cases, you may choose to reduce the payment amount rather than miss it entirely. Typically, the lender will only agree to forbearance if you request it before you start to fall behind. So, for instance, if you lose your job you may be able to request forbearance while you look for new employment.

Interest charges still accrue during forbearance. However, you avoid credit damage and any penalty charges. Once the forbearance period ends, the lender may require “catch up” payments.

Best for: Forbearance is also common with federal student loan debt, as well as with mortgages. However, any type of debt, including a credit card, can qualify for forbearance with the lender’s agreement.

Option 3: Refinancing

The main goal of refinancing is to reduce the interest rate applied to a debt. Doing so reduces the total cost of debt payment because low interest charges accrue each month. In some cases, lowering the rate may also reduce the monthly payment requirement on a debt. This double benefit can be extremely useful for debt relief.

The interest rate adjustment is permanent, meaning this usually only works for fixed-rate loans. The exception to this rule is for credit cards. Although credit cards typically carry variable rates, you can contact your creditor to negotiate rate reduction. The creditor reduces the rate as negotiated, lowering the APR applied to your debt. If the Federal Reserve changes its benchmark interest rate, your rate may increase or decrease as well. However, overall it should be lower than prior to negotiation.

Best for: Refinancing works for mortgages, auto loans, credit cards and private student loan debt. You can refinance a federal student loan. However, the interest rate is not based on your credit score. The rate is always taken as a weighted average of your previous rates or it may be based on the 10-year Treasury note index.

Option 4: Modification

When you modify a loan, you permanently change the terms of the agreement. In general, you modify to do one of the following:

  1. Adjust the principal (actual debt owed)
  2. Moved from a variable to a fixed interest rate
  3. Extend or reduce the term (length of the loan)

Best for: Modification is most commonly seen with mortgage debt. Particularly following the real estate collapse in 2008, the government offered modification programs. These gave lenders incentive to modify loans for consumers who were “upside down”; this is where a home is worth less than the mortgage balance. Modification is still possible, but less common. It’s not commonly seen with other types of loans and it doesn’t apply to credit cards.

Option 5: Consolidation

This is a form of debt relief where you combine multiple debts into a single monthly payment. Instead of paying several bills each month, you only need to worry about one. In most cases, you consolidate by taking out a new line of credit to pay off old lines. For instance, you take out a personal loan and then disburse the funds to pay off your other debts.

In general, you can only consolidate similar types of debt. So, although both credit card debt and student loan debt are eligible, they must be consolidated separately. In most cases, when you consolidate it also reduces the interest rate applied to your debt. This can deliver several types of debt relief at once.

Best for: Debt consolidation is most common with credit card debt and other unsecured debts, as well as student loans.

Option 6: Repayment plans

Repayment plans are similar to consolidation because you end up with one payment to cover multiple debts. However, instead of taking out a new loan or line of credit, you arrange a repayment plan through a third-party. Your creditors and lenders agree to accept payments from that third party on your behalf. They also agree to take reduced payments with the understanding that eventually, you repay everything you owe. You just do it in a way that works better for your budget.

Best for: There are several repayment plans available to repay federal student loan debt. A debt management program through a credit counselling agency is a repayment plan for credit cards and other unsecured debt. For tax debt, you can use an Installment Agreement (IA) to repay multiple years of back taxes.

Option 7: Settlement

As relief options go, this should only be considered as a last resort before bankruptcy. It’s basically a “nuclear option” for debt elimination. You pay back only a portion of what you owe and the creditor discharges the remaining balance. So, you settle your debt for less than the full amount owed.

Debt settlement can cause significant credit damage. Each debt settled results in a negative item that remains in your credit file for 7 years from the date of discharge. You can typically only work out settlements on debts that already passed into third-party collections. Even so, it’s still better to repay everything you owe if you have the means.

Best for: This is mostly used for debts in collections, primarily credit cards, medical bills and other unsecured debts. However, you shouldn’t even consider settlement unless you exhaust all other options. It is possible to reach a settlement agreement with the IRS on tax debt. However, you must be able to show that the IRS cannot reasonably expect to receive full repayment.

Option 8: Forgiveness

This final option is both unique and rare. A lender agrees to discharge the remaining balance on a debt without penalties or even partial payment. You must meet certain eligibility requirements and once you do, the debt is forgiven.

Forgiveness programs only apply to specific types of debt in highly specific circumstances. So, it can only be used in certain situations.

Best for:

Student loan forgiveness is possible for federal student loans. You must first enroll in a hardship-based repayment plan and work in a public service sector. Once you make 120 payments, you can qualify for Public Service Loan Forgiveness. This only works for public service professionals, like nurses, teachers and first responders.

Tax debt forgiveness is also possible, but only if you can prove Innocent Spouse. This is where you show that your spouse incurred tax debt without your knowledge. The IRS effectively decides that the debt is not really yours to repay.

Comparing debt relief programs side-by-side

The following chart compares seven of the eight programs described above. We did not include forgiveness programs, since those are specific to only certain types of debt in certain situations. To make things easy, we also combined deferment and forbearance, since the two programs are so similar.

Deferment / ForbearanceRefinancingModificationConsolidationSettlement
What does it do?Suspend/pause paymentsReduce interest rateModify loan termsRoll multiple debts into one paymentEliminate for part of what you owe
Does it work for mortgages?Yes; called forbearanceYesYesNoCalled a short sale during sale of property
Does it work for auto loans?Yes, although number of deferments may be limitedYesPossible, but rareYes, if you have multiple car loans out at onceDuring sale if you’re trading it in, but haven’t paid off loan
Does it work for credit cards?NoYes; known as interest rate negotiationNoYes; can also include other unsecured debts like medicalYes
Does it work for student loans?YesYes; federal loan rates set by T-Note index; private set by credit scoreNoYes; federal loans can be consolidated using government programsUsually only applies to private student loans
Does it work for tax debt?Yes – file a tax extension or file for Currently Not Collectible (CNC) statusNoNoNoYes
Does it cause credit damage?As long as you start paying at end of deferment period, noNoNoNoYes
Is there a cost to do it?NoMay be fees applied; for mortgages may face additional closing costsMay be fees applied; for mortgages may face additional closing costsFees depend on type of consolidation plan usedFees typically applied for every debt settled; may have to pay taxes on unpaid amount