With the average American carrying nearly $8,000 in credit card debt and card rates hovering near historic highs, debt-related stress has become a daily reality for millions of households. In today's high-rate, inflationary landscape, even the most modest credit card balance can result in a constant juggling act of minimum payments, late fees and growing balances. And, when that happens, the debt burden becomes increasingly difficult to manage. 

As a result, more people are now exploring their debt relief options, from debt management to hardship programs, to try and find some relief. And, that makes sense. While you still have to do your research and find a reputable provider to work with, the debt relief landscape has evolved significantly in recent years, and it now offers more sophisticated and consumer-friendly options than before. This evolution means you have real choices for tackling your debt.

However, not all debt relief solutions will be the right fit for you or your finances. Some work best for those who are current on payments but struggling with high rates, while others are designed for those who have already missed payments. Making the wrong choice could worsen your situation, so it's important to know the true costs and benefits of each option.

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Debt relief pros and cons to know this July

Before you choose a debt relief strategy, be sure to weigh the following pros and cons to ensure that you're making the right move for your unique situation:

Debt settlement

Debt settlement (also known as debt forgiveness) involves negotiating with your creditors or debt collectors to accept less than the full amount owed in return for a lump-sum payment on the account. The remainder of the balance is then forgiven. This process can be navigated on your own, but is typically done with the help of a debt relief company. 

Pros:

• Can reduce the balance owed by 30% to 50% or more
• May resolve debts faster than making just minimum payments
• Could stop collection calls once enrolled
• May help you avoid bankruptcy in some cases
• Could allow you to become debt-free in two to four years

Cons:

• Can severely damage your credit score 
• Forgiven debt may be considered taxable income
• There's no guarantee creditors will negotiate
• Fees are typically 15% to 25% of the enrolled debt
• Collection activities may continue initially

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Credit counseling and debt management

Credit counseling agencies offer help with managing your finances. That typically includes the creation of a debt management plan that consolidates your unsecured debts into one monthly payment with reduced interest rates and fees. 

Pros:

• Offers lower monthly payments via reduced interest rates and fees
• Rolls debts into a single monthly payment that simplifies budgeting
• Could help you develop better money management skills
• Comes with less credit damage than other options
• Creditors may agree to remove late fees and over-limit charges

Cons:

• Must close your credit card accounts 
• Doesn't reduce your principal balance
• Takes several years to complete
• Not all creditors participate
• May appear on credit report

Debt consolidation programs

Debt consolidation programs function similarly to traditional debt consolidation by combining multiple debts into one loan obligation, typically with a lower rate. The big difference is that these programs are offered by debt relief companies and have loans issued through third-party partner lenders.

Pros:

• The single monthly payment simplifies debt management
• Typically results in a lower interest rate compared to credit cards
• Offers a fixed payment schedule with a clear payoff date
• Keeps your credit accounts open
• May reduce the total interest paid

Cons:

• Requires a good credit score for the best rates
• Not all borrowers will qualify to enroll
• Could come with origination fees and other costs
• May have higher rates than traditional consolidation options
• Risk of accumulating new debt on cleared cards

Credit card hardship programs

Many credit card companies will offer hardship programs to customers who are experiencing temporary financial difficulties. These programs can result in modified payment terms or other types of temporary relief, making it easier to manage what's owed during a job loss, illness or other hardship period.

Pros:

• May temporarily reduce or waive interest charges
• Can lower your minimum payments
• Typically doesn't hurt your credit score
• No third-party fees
• Maintains your relationship with the creditor

Cons:

• Provides just a temporary solution (usually six to 12 months)
• Access may be limited to specific hardship situations
• Creditors may close your accounts during the program
• Doesn't reduce the principal balance owed
• Could affect future credit applications

Bankruptcy

Filing for bankruptcy may seem extreme, but this debt relief option provides legal protection from creditors and can eliminate or restructure debts through Chapter 7 (liquidation) or Chapter 13 (reorganization) proceedings.

Pros:

• Offers legal protection against creditors
• Provides immediate relief from collection activities
• Can eliminate or restructure most unsecured debts
• Allows you to keep essential assets in most cases
• Provides a fresh financial start

Cons:

• Severely impacts credit score for up to 10 years
• Comes with expensive attorney and court fees
• Could result in losing non-exempt assets
• Doesn't eliminate all debts 
• May limit your borrowing options and result in higher rates

The bottom line

Debt relief can provide much-needed breathing room if you find yourself unable to manage your financial obligations, but not every option works for every type of borrower. That's because each debt relief strategy comes with its own set of risks and rewards, and choosing the wrong one could set you back further. 

So, before moving forward, take time to carefully review your finances, understand the potential impact on your credit and future goals and seek advice from a debt relief expert if you're still unsure about which path to take. A well-informed decision can put you on the path toward lasting financial stability, so putting in a little work now to find the right fit could pay off significantly in the future.