When your debt payments take more than you can pay each month, you’ll see ads for all kinds of debt relief options. They work in very different ways. Some lower your interest and keep your accounts in good standing. Others cut what you owe but damage your credit for years.
This guide compares the four main debt relief options, using guidance from the Federal Trade Commission (FTC): doing it yourself, a debt management plan through credit counseling, debt settlement, and bankruptcy.
Option 1: Handle it yourself
Before you pay anyone for help, try the options that cost nothing:
- Call your creditors. Ask for a lower interest rate, a hardship program, or a payment plan. Our guide on negotiating a lower credit card APR has scripts.
- Pick a payoff order. The snowball method pays the smallest balance first. The avalanche method pays the highest interest rate first. Run your own numbers in our debt payoff calculator.
- Consolidate. A consolidation loan or a balance transfer card can replace several high-rate debts with one lower-rate payment if your credit still qualifies. See consolidation loans vs. balance transfer cards.
This works best when your income covers your minimum payments and you need a lower rate or a plan.
Option 2: Credit counseling and a debt management plan
A credit counselor reviews your income, expenses, and debts and helps you build a plan. If a structured plan makes sense, the counselor may offer a debt management plan (DMP).
How a DMP works, according to the FTC:
- The counseling agency works out a payment schedule with you and your creditors.
- Creditors may agree to lower your interest rates or waive some fees.
- You make one monthly deposit with the agency, and it pays your creditors.
- DMPs cover unsecured debts such as credit cards, medical bills, and some loans. They don’t cover mortgages or car loans.
- A plan can take 48 months or more to finish.
- You may have to agree not to apply for or use new credit until the plan is done.
Cost: Counseling agencies charge setup and monthly fees for DMPs. The FTC says to get fee quotes in writing, and to choose an agency that will help you even if you can’t afford the fees.
Watch for: The FTC warns that a nonprofit label doesn’t guarantee an agency is free, affordable, or legitimate. Walk away if a counselor says a DMP is your only option before reviewing your finances, or charges high fees up front. Credit unions, universities, Cooperative Extension offices, and military financial managers are good places to start looking.
Best for: People with steady income who can repay the full balance at a lower interest rate.
Option 3: Debt settlement
Debt settlement companies try to get creditors to accept less than the full balance. They usually tell you to stop paying your creditors and save money in a dedicated account instead. Once enough builds up, the company offers creditors a lump sum.
The FTC lists serious risks:
- Stopping payments leads to late fees, penalty interest, and damage to your credit.
- Creditors and collectors can keep calling, and they can sue you while you wait for a settlement. A court judgment can lead to wage garnishment.
- Creditors don’t have to agree to settle.
- Many people drop out before finishing, and programs can take years.
- Forgiven debt may count as taxable income.
Fees: Under FTC rules, a debt settlement company can’t charge you until it settles a debt, you agree to the settlement, and you make at least one payment to the creditor under it. Any company asking for fees up front is breaking the rules.
Best for: Few people. It can make sense for someone already far behind on unsecured debt who has a lump sum available, and even then you can often negotiate a settlement yourself.
Option 4: Bankruptcy
Bankruptcy is a court process that can wipe out or restructure debts. The FTC describes the two types most people file:
- Chapter 7 sells some of your property that isn’t protected by law and uses the money to pay creditors. Most remaining unsecured debts are then wiped out. You have to pass a “means test” based on your income.
- Chapter 13 lets people with steady income keep their property and repay debts through a plan lasting three to five years.
Costs: Court filing fees run several hundred dollars, plus attorney’s fees.
Required steps: You must take credit counseling from a government-approved organization within six months before filing, and a debtor education course after filing. The U.S. Trustee Program keeps the list of approved providers.
Credit impact: Bankruptcy can stay on your credit report for 10 years. Most other negative information stays for seven.
What it usually won’t erase: child support, alimony, most taxes, fines, and most student loans.
Best for: People whose debts are far larger than what they can repay in a few years, or who face lawsuits and garnishments. Talk to a bankruptcy lawyer. Many offer free consultations, and legal aid programs may help if you qualify.
Side-by-side comparison
- Do it yourself: No fees. No credit damage if you stay current. You repay the full balance.
- Debt management plan: Setup and monthly fees. Your accounts stay current once you’re in the plan. You repay the full balance at lower rates, usually over four years or more.
- Debt settlement: Fees after each settlement. Serious credit damage from missed payments. You may pay less than you owe, but you risk lawsuits and taxes on forgiven debt.
- Bankruptcy: Court and lawyer fees. On your credit report for up to 10 years. Can erase or restructure most unsecured debts.
How to choose
Ask yourself three questions:
- Can I afford my minimum payments? If yes, start with doing it yourself or a DMP.
- Could I repay the full balance in about five years at a lower rate? If yes, a DMP is worth a call to a reputable counselor.
- Is repaying the full balance out of reach? Talk to a bankruptcy lawyer and a nonprofit counselor before signing with a settlement company.
Whatever you choose, keep paying for housing, utilities, food, and transportation first. Our guide on what to do when you can’t pay your bills covers that part.
If collectors are already calling, read your rights when a debt collector contacts you. More guides are in our Debt Center.
