Key Points

  • Some debt relief options discharge all debts without repayment. Others will eliminate the amount owed after partial repayment, and some require you to repay the full balance.
  • To decide the best path, you must consider your immediate and long-term financial circumstances and goals, along with how much you can realistically contribute toward debt elimination each month.
Which Debt Relief Option is the Best

You pay extra on one or two credit card bills for six months and finally have a little breathing room. Then the car breaks down, the television dies, or your child hits a growth spurt, undoing months of progress. Double-digit, daily compounding interest rates combined with minimum monthly payments that barely cover the interest can reverse months of success in paying off debt with a single financial event.

Doing the identical thing you have always done will perpetuate the debt cycle actively working against you. Do you want the pattern to continue, or are you serious about getting out of debt?

If you have been on the debt treadmill for too long and need an effective strategy for your current debt challenges, it might be time to look at your debt relief options and make some hard choices.

Debt Relief Options Available to You

The three primary ways to achieve relief from current unsecured debts include credit counseling, debt settlement, or bankruptcy. All debt relief options have positive and negative aspects to them.  No path to becoming debt free is painless or comes without some sacrifice and no one solution is right for everyone.  You, and only you can evaluate the options available to you and determine if you can both qualify for and be effective in sticking to the plan prescribed to finally be free from debt.

Credit Counseling

Non-profit agencies provide credit counseling services, financial education, financial courses, and debt management plans or DMPs. You will have free access to financial education and credit counseling but pay a small fee for classes or enrollment in a debt management plan.

A Debt Management Plan is the specific program offered by credit counseling agencies and participating creditors that assists with your debt elimination journey. To qualify, you must earn enough to repay 100% of existing balances, plus interest at a reduced rate, within 60 months. Most clients entering a program have under $20,000 in unsecured debts and need help managing multiple monthly payments. Those with more than $20,000 in unsecured debts will need to be able to show sufficient income to pay off the higher balances plus interest within 60 months or less.

Once enrolled in the program, creditors will close all enrolled accounts, which will negatively impact your credit score and could make it more challenging to acquire new credit. To help you pay down the debt faster, the agency will contact creditors on your behalf, seeking lower interest rates and waived fees. In most cases, the monthly payment required will increase in order to accelerate a payoff within the 60 month program period.

If you are unable to complete the program within five years, creditors can reinstate your original interest rate and could reapply any waived fees.

A debt management plan administered through a credit counseling agency is best suited for people who have become over extended but have not necessarily experienced a major financial hardship.  Consumers who can demonstrate consistent and sufficient income to pay off their balances plus interest in 60 months or less are most likely to qualify for this type of debt relief program.  But failure to complete a debt management plan can put you back on the debt treadmill with high interest rates compounding daily and reinstated late fees that were previously waived.

Debt Settlement or Debt Negotiation Program

If you cannot qualify for credit counseling because you are unable to meet the rigorous repayment schedule, and you want to avoid bankruptcy due to the long term negative impact to your credit score, debt settlement might provide more realistic debt relief and in most cases can have you out of debt in 24-48 months. Debt settlement is a legal solution that allows you to pay less than the full balance on unsecured debts for those who can demonstrate as financial hardship.

The loss of a job, reduced hours, an illness or disability of a spouse or family member, death of a spouse or other financial hardship could create circumstances that make it possible to achieve debt relief without having to repay current balances in full.

Creditors of unsecured debt have limited legal redress to collect on unpaid balances. Once an account becomes delinquent, your creditors become motivated to work with you to recover as much of the outstanding balance as possible.

When an account reaches the default status and is charged-off, creditors often sell the debt to a debt buyer for substantially less than the balance owed. The longer the bill goes without payment, the less value it has to creditors and debt buyers. These circumstances, combined with your documented financial hardship, give you leverage to reach a debt settlement for less than the full balance owed.

Most people can complete a debt settlement program in two to four years, depending on the amounts owed and how much they can contribute monthly towards debt elimination. Debt settlement companies generally target to settle debts at roughly 50% or less of the enrolled balance, however, each circumstance is unique, and settlement percentages can vary substantially from company to company and depending on the type of debt enrolled and the balances you carry.  Another factor impacting the Settlement of a debt has to do with your ability to make a single lump sum payment or if you required monthly payments to fulfill a settlement agreement.  Anytime you can pay a single lump sum to settle an account, creditors are much more likely to discount the amount of the debt settlement.

When you enter a debt settlement program, you will begin to fund a special purpose savings account held at a different financial institution that is not a part of the debt settlement company.  You own this account, control the fund in the account and you must provide your approval of any settlement offer before the funds can be released to pay your creditor.

By funding your debt settlement savings account, you will begin to build up funds your debt negotiators will use to make offers to settle debts with your creditors.  Late payments will lower your credit score in the near term, as does carrying balances close to the credit limit. When you enter a debt settlement program, creditors will close enrolled accounts that become seriously delinquent, which could temporarily lower your credit score. This also creates leverage for your debt negotiators to get a better settlement for you.  Depending on how quickly you settle debts, it is possible to restore your credit by making timely payments on remaining open accounts and establishing new lines of credit you pay in full each month.


Individuals will typically file Chapter 7 or Chapter 13. While there are other types of bankruptcy program available, they are typically for corporations or special cases like family farms.

Chapter 7 Bankruptcy

Congress created the Chapter 7 bankruptcy for consumers who experience a long-term financial decline that prevents them from repaying debts. Like Debt Settlement, Disability, illness, and long-term unemployment are a few of the circumstances that could lead to bankruptcy.

You must qualify for Chapter 7 bankruptcy, which will discharge debts without requiring you to repay creditors. Your income must be lower than the median income in your state or you must pass a “means test,” which takes income and expenses into account for higher-income earners.

If you qualify, the bankruptcy trustee assesses your finances, reviews exempt assets, and requires the sale of non-exempt assets to repay creditors. You must also complete two debt counseling courses before discharging the debt. Once approved, you can receive a full discharge of most unsecured debts within six months of filing.

Chapter 7 bankruptcy offers the highest level of relief but has the most significant and lasting impact on your credit score. Not all debts qualify for discharge, and you could lose property such as a home or vehicle in the process. And while Chapter 7 bankruptcy is reported on your credit file for 10 years, if asked on job, mortgage or employment applications if you have ever filed bankruptcy, you must answer truthfully as filing for bankruptcy becomes a matter of public record.

While most people file for Chapter 7 when petitioning the bankruptcy courts for relief, many are unable to qualify due to income or means test outcomes.  When denied for a Chapter 7 Bankruptcy, your application can be converted to a Chapter 13 bankruptcy, meaning you will end up having to pay back a significant portion of your debts to creditors.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy reorganizes secured and unsecured debts to establish a debt repayment plan over a five-year term. The bankruptcy trustee oversees the repayment of your debts, and each creditor receives some payments before the court will discharge the remaining balances.

If you can’t qualify for Chapter 7, the bankruptcy trustee can convert the petition to Chapter 13, requiring you to repay creditors. You must fulfill the same education requirement as Chapter 7. A judge will discharge debts after completing the program, eliminating your legal obligation to repay creditors in full, but paying back a portion of the debt.

Chapter 13 bankruptcy is like debt settlement in that you pay back creditors a portion of what is owed.  But, unlike debt settlement, where consumers can be debt free in 24 – 48 months and then immediately begin repairing their credit score, Chapter 13 Bankruptcy takes 60 months to complete, requires court supervised financial education counseling and negatively impacts your credit score during the 7 years while it is reported to the three major credit bureaus.

If forced to file for Chapter 13 bankruptcy, it may be better to consider a debt settlement program as both options require you to pay back your creditors a portion of what you owe, but debt settlement programs are typically take less time to complete, and don’t have a lasting negative impact on your credit score like bankruptcy.

Which Debt Relief Option is Right for You?

Credit Counseling gives you control over the repayment process. You decide which debts to enroll and have control over monthly payouts. You work directly with a credit counselor who coordinates creditor payments. Creditors will close enrolled accounts, which could hurt your credit score.

Credit counseling is best for consumers with enough financial means to repay 100% of the debt owed within a five-year timeframe.

Debt Settlement provides immediate relief from high monthly payments while giving you control over the process. You control which accounts to enroll and how much you can afford to pay toward debt elimination each month. Creditors do close enrolled accounts and entering the program will result in an initial decline in your credit score. There is no education requirement, and you can leave the program if financial circumstances change.

Debt settlement is best for consumers who have experienced a financial hardship that prevents them from repaying unsecured debts in full and have an ability to pay back some of what they owe.

Chapter 7 Bankruptcy can eliminate unsecured debts without any repayment required. Filing for bankruptcy will provide immediate relief from creditors and can stop legal action and wage garnishments. Chapter 7 has the most dramatic negative impact on your credit and requires the longest recovery time.

Chapter 7 is best suited for consumers who experience a long-term or permanent decline in their financial circumstances and do not have assets that can be liquidated to repay creditors.

Chapter 13 also provides immediate relief from creditors and can stop a foreclosure, wage garnishments, and other legal actions taken by creditors. However, you do not retain control over the process. The bankruptcy trustee will oversee your finances and debt repayment while in the program.

Chapter 13 is best suited for consumers who do not qualify for Chapter 7 bankruptcy and want a court-supervised repayment approach when dealing with creditors. It could also help consumers who want to save their home from foreclosure or need relief from existing wage garnishments.


  • What are my options when seeking relief from debt?

    Debt relief typically includes credit counseling, debt settlement, or bankruptcy. Credit counseling requires you to repay all debts in full. Debt settlement and Chapter 13 bankruptcy allow partial debt payments to creditors. Chapter 7 bankruptcy does not require the repayment of debt balances.

  • How do debt relief programs impact my credit?

    Credit scores come from the information on your credit file, which records a 7 to 10-year debt repayment history. The two most significant factors include payment history and credit utilization, which tracks credit limits in relation to balances carried. Missing payments and having high debt loads will negatively impact your credit. Most debt relief options cause an initial decline in your credit score that recovers as you pay off debts.

  • How long will it take for my credit to recover after using debt settlement?

    In most cases, it takes 12 to 24 months for your credit score to return to pre-program levels.