Key takeaways

  • Working with a debt relief company can carry risks and may not be the best solution for everyone struggling with debt.
  • Alternatives to debt relief, such as budgeting, negotiating with creditors and debt consolidation, could help individuals avoid further damaging their credit.
  • Seeking help from a financial advisor or credit counselor can also provide valuable support and guidance in managing debt.

When you’re overwhelmed by debt, you may feel desperate to find a solution to get immediate relief and hire a third-party for help. However, working with a debt relief company can carry risks of its own. Before taking that step, consider alternatives to get control of your debt without further damaging your credit.

4 alternatives to debt relief

A debt relief company could potentially save you time and money while bringing you some much-needed breathing room in your budget. However, many debt relief companies ask you to stop making payments to your creditors, as they are more likely to work out a repayment plan if you’ve already fallen behind, which can be a huge gamble.

Although debt relief companies will try to renegotiate your debts with creditors, there’s no guarantee that all your debts will be settled. This can leave you with further damage to your credit score, plus increased debt, as you will also be responsible for paying any late fees and additional accrued interest.

Alternatives to working with a debt relief company require some additional work on your end, but they could help you avoid some of the risks you would otherwise take on.

1. Budget

The foundation of financial wellness starts with your income and your ability to budget. When reassessing your spending habits it’s crucial to save money while not eliminating all nonessential costs. A budget based on the complete removal of all discretionary spending is not sustainable, which is why balance is important.

One of the most common budgeting approaches is the 50/30/20 rule. This divides your spending into three categories: needs, wants and savings. In this case, savings can be used towards paying down your debt.

Bankrate insight
If you earn $3,500 after taxes, the 50/30/20 rule will give you $1,750 (50 percent) to put towards needs, $1,050 (30 percent) for wants and $700 (20 percent) to tuck away in savings.

2. Negotiate a payment plan with your creditors

Communication is key when getting your finances back under control. While it may feel intimidating to connect with your creditors, being proactive may help prevent additional financial distress. The moment you see debt building beyond your means, it is smart to communicate with creditors and explain the situation.

In some cases, creditors will be able to help in managing your debt. By disclosing your concerns early on you may be able to lower your monthly payment or put it on pause, which will help in avoiding missed payments and potential damage to your credit.

3. Consider debt consolidation

Debt consolidation consists of taking out a new loan, line of credit or balance transfer credit card to pay off multiple debts. This can make your debt more manageable, as you will only have to deal with one due date a month and one creditor.

You may be able to save some money on interest if you manage to secure a lower rate than that of your current debts combined. This solution is especially ideal for those dealing with high-interest credit card debt. It can also help boost your credit score by lowering your credit utilization ratio.

If you choose to consolidate your debt, make sure to compare quotes from at least three different lenders to ensure you get the best offer available to you. When comparing lenders, look beyond the APR for other features, like discounts and highly rated customer service.

Be mindful about your spending after consolidating your debt. Continuing to rely on your credit cards will increase your debt-to-income ratio and credit utilization ratio, which will put you back where you started.

4. Talk to a financial advisor or credit counselor

If you feel lost, your bank or credit union may be able to put you in touch with a financial advisor or representative. These individuals can look behind the curtain at your finances and talk you through opportunities for you to do better in the future and walk you through what to do now.

Likewise, you could seek help from a credit counseling agency. Similar to debt relief companies, credit counseling agencies can establish a debt management plan to help you get out of debt.

Credit counseling agencies also partner you with a dedicated counselor who will guide you through your journey to get out of debt. Although some credit counseling agencies are for-profit, there are many nonprofit ones that may offer counseling services for free.

When to consider debt relief

There are some specific scenarios where debt relief is likely the best choice for you and your finances. You may want to explore debt relief if any of the following apply:

  • Considering bankruptcy. If you are on the edge of having to file bankruptcy, it may be time to turn to professionals.
  • Struggling to handle debt. Debt continues to build even after you have tried to handle it on your own.
  • Can’t afford monthly bills. If you are struggling to afford your monthly bills and falling behind on credit card or loan payments.