Is debt relief worth it? 3 times it is (and 3 times it's not)

After a tumultuous two years in the economy, the year-over-year Consumer Price Index has stabilized at around 3% to 4%, down from the 9.1% peak in 2022. Many experts also predict that the corrective Fed Rate hikes are over — after a series of 11 since March 2022. 

Still, these and other factors have led many Americans to be further into debt. Credit card balances and delinquencies have both been on the rise since the start of 2022, as has the average amount of debt U.S. households are carrying.

If you're one of the many people facing debt but looking for a lifeline, a debt relief strategy may be able to help. 

Feeling overwhelmed by debt? Explore your debt relief options here.

Is debt relief worth it? 3 times it is (and 3 times it's not)

Before we examine when debt relief is or isn't worth it, let's look at what debt relief is. 

Debt relief refers to various strategies that aim to help consumers get out of debt, including: 

• Debt consolidation: Debt consolidation involves refinancing multiple debts into a single larger debt in order to streamline your repayments and, ideally, lower your borrowing costs. 
• Credit counseling: Credit counseling involves non-profit organizations with certified and trained counselors reviewing your financial situation and developing a personalized plan to get you out of debt. 
• Debt management plans (DMP): DMPs involve hiring a credit counselor to contact your creditors, negotiate down the costs of your unsecured debts and set up new payment plans. A single payment is then due each month to your counselor who pays your creditors.
• Debt settlement: Debt settlement involves making an agreement with a creditor to pay less than you owe to settle a debt, often via a lump sum. Companies exist that will attempt to do this on your behalf.

The right debt relief strategy for you will depend on your situation, and in some cases, it may be best to forgo them all.  

Find out more about how debt relief could benefit you here.

When debt relief is worth it

Debt relief can be worth it in the following scenarios. 

When it can save you money 

The two main goals of debt relief plans are to save you money and bring you relief. If a debt relief plan can do one or both, it can be worth it. 

For example, if you get approved for a competitive personal loan that's large enough to pay off three of your outstanding credit card balances, debt consolidation could make sense. If the interest rate is lower than the average APR on your credit cards, it could save you money. 

When it can streamline your repayments

Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. 

"One of the biggest advantages of going through a debt relief program is the savings. These programs often consolidate multiple debts into a single, more manageable payment, simplifying the repayment process with a structured plan and potentially saving debtors money on interest," says Leslie H. Tayne, the founder and head attorney at Tayne Law Group. 

When it can reduce your stress

Debt relief can also make sense if you're feeling overwhelmed and need support. It can be difficult to deal with various payments and creditors, especially if you're falling behind and receiving aggressive collection attempts. But a certified and trained debt relief professional can take some of the stress off of your shoulders and get you headed in the right direction.  

"A debt relief program may be a viable option when an individual's debt is overwhelming and cannot be managed through traditional repayment methods," says Amy Colton, CDFA, a wealth advisor with Forefront Wealth Partners and divorce financial guide with Your Divorce Made Simple. 

"It is particularly suited for those facing financial hardship, where the likelihood of repaying debts in full is low, and the alternative may be bankruptcy," she says. 

When debt relief isn't worth it

Debt relief can also come with drawbacks and may not be the best solution in the following scenarios.

When it won't save you money

If your main problem is stress from managing too many payments, you may consider debt relief even if it's not going to save you money. However, be sure to run the numbers. If the costs are too high, it may put you in a worse situation long term. 

Additionally, it's worth noting that the IRS considers settled debt taxable income, so you have to pay income taxes on any amounts your creditors agree to discharge, forgive or cancel. 

Hiring a debt professional also comes at a cost and may not end up saving you money. 

"There's no guarantee that creditors will agree to negotiate or settle debts; some may even refuse to work with certain debt relief companies," says Tayne, "Your creditor could also sue you if they refuse other options."

When you want to preserve your credit score

Debt settlement companies typically instruct you to stop paying your creditors and start paying them instead. They work on accumulating a lump sum that can later be offered to creditors in an attempt to settle your debts. 

While this may work, it wreaks havoc on your credit, which will impact you for seven years. Note, though, that debt management plans and debt consolidation won't have the same effect. Debt management plans are more likely to have a negative impact on your credit score.

When you can manage it on your own

Debt relief companies generally can't do anything you can't do on your own. You can contact your creditors and attempt to negotiate, settle or restructure your debts. However, they can offer expert guidance and the relief of not managing it all yourself. Only you can decide if the potential benefits are worth the costs. 

"Alternative routes may be preferable when an individual's debt level is manageable with budget adjustments, or when they possess a credit score they wish to preserve," says Colton.