Which Debt Relief Option is the Right One for Me?

Key Takeaways
  • The major debt relief options include credit counseling, debt settlement, and bankruptcy.
  • You can utilize the benefits of debt relief even if you have not missed payments.
  • If you are struggling to keep up with high-interest debt payments, the sooner you seek help the more choices you will have available.
  • All debt relief solutions will cause an initial decline in your credit score.
  • Debt relief options help you repay unsecured debts only.

The stress from carrying large amounts of high-interest credit card debt can make it feel as though an elephant is sitting on your chest. The balances grow each month, and so do your minimum payments.  It feels as though you will never see the day when you are free from the shackles of debt.  You’ve started to research options, but still have more questions than answers.  You don’t want a slow and painful road to the finish line, you want relief from the stress, immediately! 

If you are currently behind on your monthly payments, you want the constant barrage of collection calls to stop. If you are current on your bills but worry that one small event could cause your financial house to collapse, you want a long-term solution that will give you hope for the future. 

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Making minimum payments on credit card debt for the next 30 years is not going to help your overall financial picture for decades. Over 95% of that minimum payment goes towards interest, not paying down credit balances, leaving you like a hamster spinning on a wheel.  

There are four primary options for debt relief, which are suitable for most people: credit counseling, debt settlement, Chapter 13 bankruptcy, or chapter 7 bankruptcy. Here is an overview of each so you can decide which option is the right one for you.

Credit Counseling Debt Settlement Chapter 7 Chapter 13
Offers immediate payment relief No Yes Yes Yes 
You maintain control of the process Yes Yes No No
You decide which debts to include Yes Yes Yes No
You control monthly payments Yes Yes N/A No
Can withdraw if finances change Yes Yes N/A No
Account closure required Yes Most, but not all Yes Yes
Accepts secured debts No No No Yes
Accepts unsecured debts Yes Yes Yes Yes
Negatively impacts your credit Yes Yes Yes Yes
Can accelerate repayment  Yes Yes N/A No
Counseling required Yes No Yes Yes
A legal option to repay less than the full balance  No Yes Yes Yes
Must pay 100% of the debt plus some interest Yes No No No
Must repay a portion of the debt No Yes No Yes


Credit Counseling

Credit counseling involves working with an approved agency, which establishes a debt management plan to repay debts. You make a single payment each month to the credit counseling agency, and they allocate payments across all the credit account you enroll in the program. You approve the plan and choose which accounts to enroll, giving you some control over the process. 

If you qualify for the program, it will take between three and five years to complete the program, which requires 100% repayment of the outstanding debt plus some of the interest as well. After enrollment, the credit counseling agency will work with creditors to waive fees and lower interest rates on your accounts, saving you money on the accumulating debt. Not all creditors will work with credit counseling agencies, and each creditor has different parameters for qualification, and the terms of their programs.  It is important to note that you will need to demonstrate a suitable level of income to pay all your mandatory bills plus the payments required under the debt management plan.  

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In addition to the debt management plan, the agency offers credit and budget counseling, often at no charge. Credit counseling agencies only accept unsecured debts such as credit cards, deficiency loans, and personal loans

Leaving the program after enrollment will result in the reinstatement of waived fees and interest, reversing the benefit of credit counseling. You may, however, speed up the repayment process with additional payments, reducing the time it takes to eliminate your debt. 

Finally, a statement will be added to your credit file indicating your enrollment in a credit counseling program.  While this does not factor into the calculations of your credit score, the presence of this remark on your credit file will make it unlikely you will be able to establish new lines of credit during the duration of the credit counseling program.

Benefits and Drawbacks of Credit Counseling


  • You pay 100% of the debt and meet your financial obligations
  • Within five years you become debt-free, provided you have not opened any new accounts
  • You have control over which debt to enroll
  • Low-cost program because creditors pay the credit counseling agency
  • The agency provides free credit counseling, improving your financial skills


  • You must repay 100% of the debt plus some interest
  • Monthly payments may be more than your current minimum monthly payments in order to meet the five-year repayment requirement
  • Your ability to open new credit lines is limited, even though you are meeting your financial obligations 
  • Difficult to qualify because of higher monthly payments and income requirements
  • Not all creditors waive fees or lower interest rates to the same levels.  You may not be able to obtain the monthly payment relief you desire


Credit counseling is best suited for people who are current on debts, comfortable making payments at the current level but want to expedite debt elimination. The credit counseling process can improve your discipline and give you an accountability partner. It also simplifies debt repayment, because you make one payment to the agency and they pay the individual bills each month. 

Debt Settlement

Debt Settlement is sometimes referred to as debt negotiation and involves working with a company that specializes in negotiating with creditors on your behalf. You choose which accounts to enroll and begin making monthly payments into a dedicated savings or trust account to build up a balance your negotiators can use to resolve your outstanding debts.  In a debt settlement program, payments are not disbursed to your creditors until a mutually agreed-upon settlement plan has been reached.  The time it takes to reach a negotiated settlement on your accounts will cause accounts to go delinquent, making them less valuable over time to the creditor.  As the value of these accounts goes down, creditors and collectors become more motivated to accept less than the full amount owed on the outstanding balances.

Once the company reaches a settlement agreement with your creditor for less than the outstanding balance, you authorize them to make the agreed-upon payments from the savings account. Negotiated agreements can consist of a single payment or monthly installments for up to 12 months or longer depending on the amount of the settlement and the amount your able to pay each month.  

When you complete the repayment of the debt, the creditor will report the account to the credit reporting agencies as “Settled in Full”, relieving you of any further legal obligation for the debt. 

It is possible to complete the program in less than four years, depending on the amount of debt you enroll in and the amount of money you set aside for debt reduction each month. At any time, you can make a lump sum payment to accelerate the debt payoff. 

Benefits and Drawbacks of Debt Settlement


  • Creditors agree to a settlement for less than the full payoff 
  • Immediately lowers monthly payments to a more manageable level
  • A negotiated settlement fulfills your legal obligation to repay the debt
  • FICO 9 credit scoring formula ignores settled debts previously in collection, speeding the recovery of your credit score after completing the program
  • You can be debt-free in less than four years provided you do not initiate new debt
  • You retain control over the monthly payments, savings, and the negotiated settlement agreements


  • Your accounts will become delinquent and some may charge-off before creditors are willing to accept a settlement agreement
  • Not all creditors work with debt settlement companies, but your negotiator will likely counsel you on the best way to affect a direct settlement with difficult creditors 
  • In rare cases, you may receive a form 1099 indicating that you owe taxes on the amount of discharged debt, but many times these taxes can be reduced or eliminated by filing form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with the IRS.


Debt negotiation is best suited for consumers struggling to maintain the minimum monthly payments due to financial hardship or reduction in income. Lower income levels due to a change in job status can turn a tight financial situation into an unbearable one. Consumers looking to get ahead of their debt issues, before it declines to a level requiring bankruptcy could benefit from debt negotiation.

Everything You Need to Know About Filing for Bankruptcy

Bankruptcy coordinates debt payments in a structured repayment plan or discharges all of your qualifying debts through the bankruptcy court system. After filing for bankruptcy, a trustee will oversee the process and liquidate any assets required to repay creditors. Individuals can qualify for either a Chapter 7 or chapter 13 debt discharge, depending on your circumstances. Each state has different laws that will impact the process, timeline, exemptions, and whether you qualify for Chapter 7 or Chapter 13. 

Below is an overview of each option.  

Chapter 7 Bankruptcy

In 2010, Congress tightened the laws for Chapter 7 bankruptcy, making it harder to qualify. Under a Chapter 7 bankruptcy filing, the courts review your entire financial picture including income, assets, and debts to determine if you qualify based on the means test defined by your state.  

If you qualify, you may keep a small number of assets, which often include your home, a vehicle, and equipment, such as a computer, used for work, and a small amount of cash. A few protected assets like retirement accounts do not account against the exemptions. The bankruptcy trustee has the ability to sell any non-exempt assets to repay creditors. 

A Bankruptcy filing applies to credit cards, personal loans, medical bills, unpaid judgments, and other unsecured debts. It typically will not eliminate student loans, tax liens, back alimony, or child support to name a few. Qualifying for Chapter 7 can eliminate most unsecured debts without requiring repayment or incurring any tax liability.  A chapter 7 bankruptcy generally wipes out your qualifying debts, stops any collection or legal action against you for these debts, and gives you a fresh start the begin rebuilding your financial health.  

While there certainly are some benefits derived from filing bankruptcy, there are some serious drawbacks that you should be aware of and carefully consider before filing.  First, while a chapter 7 bankruptcy remains on your credit report for 10 years (7 years for a chapter 13 bankruptcy), the impacts of filing a bankruptcy can be eternal.  Bankruptcy filings are a matter of public court records and are easily searchable through any given number of online search methods.  

Many employers, and especially government hiring agencies, consider past bankruptcies in the hiring process.  Many lenders and employers also ask on applications if an applicant has ever filed bankruptcy.  Finally, because it will be nearly impossible to establish new lines of unsecured credit during the time a bankruptcy is reporting on your credit file, and possibly for several years afterward, your very low credit score will languish for many years, forcing you to defer major purchases like a new automobile, or buying a home.


  • No longer legally required to repay creditors
  • A fast process which can discharge debts in as little as four months
  • The lowest out of pocket costs 
  • Collection efforts end upon filing
  • No tax liability on the discharged debt


  • The longest impact on your credit (10 years)
  • Must complete both credit and budget counseling  
  • Courts could require you to forfeit assets to pay creditors
  • Could permanently ban you from some jobs and security clearances


Consumers with debt levels that are 50% or more of income, preventing you from making even partial payments on existing unsecured debt are good candidates for chapter 7 bankruptcy. If you only have a few assets and limited income with little hope of turning your finances around in the next year, bankruptcy may be the best option. 

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy requires you to repay debts in up to five years under the court’s supervision. You must relinquish control over your finances, and a court trustee decides which creditors receive payments based on a repayment plan that is approved by a judge. Trustees will pay mandatory obligations such as court costs, proprietary tax liens, and back child support in full. Secured debt for your car or home receives priority over unsecured debts. 

Like a chapter 7 bankruptcy, the process will not reduce your debt obligations for the student loan debt, tax liens, child support, or alimony. 

The process involves full disclosure of all income and assets you must report in a “debtor’s examination”, along with a monthly budget of ongoing expenses. The trustee will create a repayment plan which allows you to keep a certain amount of income for living expenses. The remainder goes towards paying off debts. At the end of the repayment plan, the court will discharge the remainder of your unsecured debts. 


  • Filing stops collection efforts by creditors and debt collection agencies
  • Temporarily stops lawsuits, foreclosures, and other court action
  • Discharge of qualifying, unsecured debt after fulfilling a court-approved repayment plan
  • Reporting to credit bureaus ends after seven years instead of 10 
  • No tax liability on the discharged debt


  • You lose control over your money management for the duration of the program
  • Takes up to five years of court-supervised repayment
  • Requires the completion of both credit and budget counseling
  • Not allowed to exit the program even if financial circumstances change


Consumers who cannot qualify for chapter 7 and want a court-supervised intervention to manage their unsecured debt balances. The petition can also stop the foreclosure of your home and give you more time to catch up with payments. In the end, you receive a discharge of debt through the courts rather than a debt negotiation, both of which, however, end your legal obligation to repay the debt.   

Putting it All Together

Struggling to repay high unsecured debt balances can put your long-term financial well-being in jeopardy and wreak havoc on your short-term financial situation. Using a debt relief like debt settlement can provide an immediate financial reprieve for people who have experienced financial hardship by lowering monthly payments and helping you reduce or eliminate your debts in the fastest time possible. While chapter 7 bankruptcy provides the greatest relief in the form of repaying your debt, there are substantial drawbacks that will have a long-lasting impact on your ability to establish new credit. You should carefully consider your short term needs and your long-term financial goals when determining which program is suitable for your individual situation.  The right program can help you get your finances back on track so you can more effectively meet your long-term financial objectives. 

  • What is the difference between Chapter 7 and Chapter 13 bankruptcy?

    Chapter 7, called liquidation bankruptcy, requires you to earn less than the median income in your state or pass a means test. If you qualify, the courts will review your income, debts, and property. The court trustee will sell any non-exempt assets prior to a discharge. The process takes between four and six months to complete. Chapter 13, is a reorganization and can help you save your home or vehicle. It also requires making payments on unsecured debts for five years but gives you time to bring other accounts current. You receive a discharge after completing the court-supervised plan.  

  • What is the difference between credit counseling and debt settlement?

     Both credit counseling and debt settlement work with creditors to pay off debts and allow you to make a single payment to the company, which will distribute payments to creditors. Credit counseling requires you to pay the full amount owed, but saves you money through lower interest rates and waived fees. Debt settlement saves you money by negotiating a payoff for less than the full balance, allowing you to pay significantly less than the amount owed.  

  • Is debt settlement better than Chapter 13 bankruptcy?

    The only qualification for debt settlement is to experience a financial hardship that makes it difficult to maintain even the minimum payments on unsecured debts like credit cards. Under a debt settlement program, creditors become willing to negotiate as the account becomes delinquent, motivating them to accept a settlement. Under Chapter 13, the courts decide how much you can pay and then distribute 100% of your discretionary income to creditors for five years. The key benefit of Chapter 13 is the bankruptcy protections for assets such as your home or vehicle. If you want to keep your assets, you will have more time to catch-up on the account. On the flip side, you remain under court supervision and must submit tax returns each year, which could increase the amount you owe, if your financial circumstances improve while in the program.