Key takeaways

  • Debt consolidation, debt management and debt settlement are the three most common types of debt relief.
  • To choose the right debt relief plan, you'll need to assess your credit accounts, in addition to your financial situation and credit score.
  • Once you find the right debt relief approach, you'll need to gather a series of documents, including statements of debts and tax returns to apply for debt relief.

A recent Bankrate survey found that 36 percent of U.S. adults have more credit card debt than emergency savings — the highest level in 12 years. If you too are struggling with debt, applying for debt relief can make your payments more manageable, plus help you tackle your balances faster and even save you money on interest down the line.

Steps to apply for debt relief

There are multiple ways to go about debt relief. Follow these steps to find the right option for your needs.

1. Take inventory of your accounts and balances

To choose the best form of debt relief, you need to know the types of debt you have — credit card debt, personal loan, medical bills or the like — how much you owe, your current interest rate and monthly payment.

That is because many lenders, as well as debt relief companies and credit counseling agencies, have a minimum debt requirement for you to apply for relief. Additionally, knowing how much you owe, at what rate and the sum of all your monthly payments, will allow you to choose a debt relief plan that makes sense for your budget and help you set realistic goals.

2. Check your credit

Although debt relief companies and credit counseling agencies typically don’t have a minimum credit score requirement for you to apply for their servicers, lenders do. Each lender has its own credit score criteria, but you’ll typically need a score of at least 600 to qualify for a debt consolidation loan and a score of 700 and up to secure the lowest interest rates.

Many banks, credit unions and credit card companies offer free credit reports and scores, as part of their services. If any of yours offers this, take advantage of it to know whether a debt consolidation loan may be the best option for you.

You can also get a free annual copy of your credit report from all three major credit bureaus — Equifax, Experian and TransUnion — by visiting AnnualCreditReport.com. Although these reports won’t show you your actual credit score, you’ll get an understanding of where you stand with creditors and what accounts need the most attention.

3. Choose your approach

There are three main approaches to debt relief:

  • DIY debt relief: This approach typically consists of taking out a debt consolidation loan or a balance transfer card with a 0 percent introductory rate and rolling multiple debts into one. Both of these solutions are dependent on your creditworthiness, so they are better suited for those who have good credit to land a low interest rate and fees.
  • Debt relief company: Debt relief companies are for-profit agencies that use a combination of tools, including counseling and debt settlement services, to help you get out of debt faster in exchange for a fee. Many require you to have at least $7,500 worth of unsecured debt to work with you. Additionally, your credit score will suffer, as you’ll typically be required to be behind on payments to be eligible for relief.
  • Credit counseling agency: Although some credit counseling agencies charge a fee in exchange for their services, these are often much lower than that of debt relief companies. Credit counseling agencies typically help you get out of debt through a debt management plan and by providing you with the necessary tools to understand how to better manage your finances in the future.

What you’ll need to apply

Once you’ve decided on a debt relief strategy, it’s time to fill out your application and gather all of the necessary documentation. Although the required documents may vary depending on the strategy you choose, you’ll typically be asked for:

  • Full name and contact information.
  • Physical address.
  • Your Social Security number or individual taxpayer identification number.
  • A copy of the most recent statement of the debts you want to restructure.
  • Proof of income, such as tax returns, pay stubs and other legal documents.

These documents will help the lender, debt relief company or credit counseling agency understand your full financial picture and determine your eligibility for debt relief, as well as your options.

When is it a good idea to get debt relief?

Debt relief can be a valuable step when your finances feel as though they’ve become unmanageable, you’re unable to keep up with monthly payments or you have few options to help resolve your debt in a timely manner. It may also be a good option if you’re searching for a way to make your monthly debt payments more affordable than they currently are or would like to obtain lower interest rates from your creditors.

Debt relief can be used to address such unsecured obligations as credit card payments, personal loans and even medical bills. It can also be a way to avoid having to take a more significant step like filing for bankruptcy, which would impact your credit profile for years to come.

Alternatives for debt relief

Using a debt relief company or participating in credit counseling may not necessarily be the right approach for everyone. If they don’t feel like a good fit for you, there are plenty of other DIY options.

For instance, if you’ve built equity in your home, you might consider borrowing against that equity via a home equity loan or a home equity line of credit (HELOC). A home equity loan is an installment loan that typically comes with a fixed interest rate and fixed monthly payments. Funds are provided in a lump sum and can be used to repay all of your debts and get back on track financially. The downside of this form of borrowing is that your home is being used as collateral, meaning, if you fail to repay the loan you risk losing your home.

A HELOC is another form of borrowing that also uses your home as collateral. A HELOC functions very much like a credit card. It is a line of credit with a variable interest rate that you can tap into and use the money to pay off all of your debts.

Yet another alternative to traditional debt relief is a cash-out refinance. This involves applying for a new mortgage that replaces your current mortgage. However, the balance of the new mortgage you’re applying for will be more than you currently owe on the home. The monetary difference between what you owe on your home and the new, larger mortgage is paid out to you in a lump sum of cash. Once the funds are dispersed to you they can be used to pay off your creditors.

It’s important to remember however, that a cash-out refinance resets your mortgage and you will owe more money on your home than you did prior to taking this step. You will also have to pay closing costs on the loan.

The bottom line

Having mountains of debt can be overwhelming and hinder you from achieving other financial milestones. That said, if you’re struggling with debt, you have options. You just need to be proactive and research all the alternatives available to you before making a decision.