Whether it’s a product of student loans, excessive spending, a financial emergency or any other monetary burden, take action if you’re sinking into debt. According to Experian, the average outstanding credit card balance at the end of 2018 was over $6,500, so you’re certainly not alone if you have some outstanding balances to tackle.

While no debt relief option will magically make your debt disappear, choosing the right one for you can make an enormous difference. The four main options for debt relief are:

  • Debt consolidation
  • Debt management
  • Debt settlement
  • Bankruptcy

Everyone’s financial circumstances are unique, so there’s no one-size-fits-all solution to your debt situation. As a general rule, if your outstanding unsecured debts amount to 50% or more of your gross income, it’s time to seek debt relief. However, you don’t need to wait until you’ve hit that threshold. We will walk through what to consider when deciding on the best way to combat your debt.

Talk to your creditors first

Getting in touch with your creditors can make a major difference. Before embarking down a more serious path for debt relief, start contacting your creditors and providing them with information on why you’re behind on payments and what changes can be made to help. Both the Federal Trade Commision (FTC) and the Consumer Financial Protection Bureau (CFPB) encourage cardholders to contact their credit issuer as the first step in the process — and rightfully so.

Many credit card providers have hardship programs, and if you think a little breathing room may be just what you need to take control of your debt, you may be able to negotiate temporary adjustments to your payment options.

Debt consolidation

Possibly the most favorable option of debt relief, debt consolidation is basically merging a number of different payments into a single payment. It’s a strategy you can definitely undertake on your own, but will require a plan, a budget and some financial discipline.

If dealing with credit card debt, consider a balance transfer card. While it seems counterintuitive to open another credit card, balance transfer cards offer introductory interest-free periods, typically for 15 to 21 months. By moving all your outstanding balances onto one card where you won’t have to pay interest for a time, you can avoid high-interest from other cards and every dollar you pay will go directly to reducing your balance, helping you get out of debt faster. You can use repayment calculators to figure out how much you’ll be able to reduce your debt, or even pay it off in full, before your balance transfer card’s regular APR kicks in (balance transfer fees may apply with each transfer).

If you have different types of debt, like a mix of credit cards and loans, you can still consolidate by taking out a personal loan to pay them all off. You’ll still pay interest on the loan, but it may be a lower rate than some of the high interest accounts it pays off.

Pros of debt consolidation

  • Develop a simpler repayment process by consolidating outstanding balances.
  • Boost your credit by creating a history of on-time payments.
  • Learn good financial habits and instill discipline into your budget.
  • Know where your money is and stay in control of your own finances.
  • Avoid paying fees to third-parties.

Cons of debt consolidation

  • Consolidating your own finances can be stressful, especially if you have a large number of debts or owe a large amount.
  • Strict budgeting may require lifestyle changes.
  • You will be tackling your full debt amount.
  • Depending on how much you owe, a single consolidated payment may still be more than you can afford.
  • It will take time to build a solid payment history and increase your credit score.

Debt management

With a debt management plan, a credit counseling organization will negotiate with your creditors to come up with a realistic payment plan to pay off your debt, typically over three to five years. You’ll still be responsible for your full debt amount, but often with reduced interest rates and waived fees. The negotiations also take into account your income and expenditures, meaning the payment plan is designed around your unique financial situation. You’ll know before making any commitments what your monthly payments will be, and will receive credit counseling and budgeting guidance to help you develop good financial habits. You may be restricted from using your credit cards or applying for new credit for the duration of the plan.

When pursuing this option, you’ll make a single payment to your agency each month to be distributed out to your creditors — this simplified payment process may be the key to getting back on track. Debt management companies do require a small set up fee and monthly maintenance  payments throughout your plan, but since they’re often non-profit organizations these fees are minimal.

 Pros of debt management

  • Receive a debt payment plan, based on your financial situation, to pay off your debt in full over three to five years.
  • Pay a lower interest rate or reduced fees.
  • Monthly payments to continue paying down your debt will help improve your credit score by building a history of on-time payments.
  • Financial education with credit counseling and budgeting advice.
  • Make a single monthly payment to your debt payment company.

Cons of debt management

  • A commitment of several years is required to slowly pay off your debt. Dropping out midway or falling behind on payments means you’ll likely lose the concessions negotiated on your behalf, like lower interest rates and waived fees.
  • Closing or having restricted access to your credit card accounts during the program may be a difficult adjustment.
  • Not entirely hands-off. You’ll still need to track your monthly statements to ensure the debt management company is making the correct payments on time.
  • Debt management plans are only available for unsecured debts – you’ll have to manage any outstanding secured debts, such as a mortgage, on your own.

Debt settlement

Debt settlement companies will negotiate with your creditors on your behalf to arrange a lower lump-sum payment—typically 50 to 80 percent of your outstanding balance. During negotiations, the debt settlement company will ask you to stop making payments on your debt and start making payments to an escrow account. It then uses the balance of that account to make an offer to each of your creditors. The most successful debt settlements consist of transparency between you and the company, a swiftly decided upon agreement and you walking away paying less than your full debt amount.

While the option of paying a reduced amount is appealing, debt settlement still comes at a high cost and most financial experts recommend it only as a last resort. Depending on the amount you owe, it can take two to three years to put enough into the escrow account to submit appealing lump-sum offers to creditors. In the meantime, you’re racking up late fees and penalties for all the debts you’ve stopped making payments on and your credit score is taking some serious hits for missed payments. You’ll also have to pay a fee to the debt settlement company that can be as high as 15 percent of the amount owed or 25 percent of the amount saved.

Pros of debt settlement

  • Pay less than your full debt amount.
  • Work with the debt settlement company instead of having to deal with multiple creditors.
  • Avoid filing for bankruptcy.

Cons of debt settlement

  • Creditors may not negotiate. Some banks and card providers have zero tolerance for settling debts.
  • Monthly payments to the debt settlement company to reach a lump sum of 50 to 80 percent of your debt takes time.
  • Negative impact on your credit score from missed payments to creditors during negotiations. You will likely also face late fees and possibly increased interest rates.
  • Fees to the debt settlement company, even in the event of an unsuccessful settlement.


If you’ve found yourself in a position beyond consolidation, where you don’t have the funds to make the necessary monthly payments of a debt management plan or a lump-sum debt settlement, your only debt relief option may be filing for bankruptcy. It’s best that you first talk with a bankruptcy attorney, many of whom offer free initial consultations. Most experts agree that bankruptcy is a good option if you have more than $15,000 in debt and/or it will take you more than five years to pay off your debt. Keep in mind, bankruptcy won’t make any difference to taxes, alimony or child support and federal student loans.

The most common form of bankruptcy is a Chapter 7 liquidation. If you qualify, this can be done in three or four months and could erase what you owe in unsecured personal loans, outstanding credit cards and medical debt. While you’ll be able to keep certain key assets, a court trustee will help sell off valuable items to repay your debts and the court will clear the leftovers.

If you own a home you want to protect from foreclosure or if your income level is above the median for your state and the size of your family, you may need to look towards Chapter 13 bankruptcy, instead. Chapter 13 bankruptcy takes three or five years, depending on your debts and income level, and must be court-approved. Rather than waiving the debts after selling items of value, this method will provide you a friendlier repayment plan based on what you’re capable of paying.

Pros of bankruptcy

  • You’ll get a fresh start.
  • Most of your debts will either by waived, after selling your possessions, or restructured with a payment plan that fits your circumstances.
  • Debt collectors will be prohibited from contacting you about debts or filing lawsuits against you.

Cons of bankruptcy

  • The liquidation process of Chapter 7 bankruptcy will require you to sell off personal items.
  • Your credit score will take a hit. Depending on your initial score and the amount of debt you owe, you may see your score drop as much as 250 points.
  • Bankruptcy will remain on your credit history for seven to 10 years. This may make it difficult to obtain a loan or credit card, or mean you’ll be subject to higher interest rates.
  • Administrative fees average $300 to $400, in addition to the attorney fees if you seek representation.

Things to avoid with debt relief

No matter the reason your debt has accumulated, if you’re in a situation where you need relief it’s important to know what not to do:

  • Avoid withdrawing money from your retirement savings to pay off your unsecured debts.
  • Stay away from any debt management or debt settlement company with a bad reputation, one of these firms could dig you an even deeper hole.
  • Don’t allow creditors and collectors to force you into a decision you’re not sure about. Their primary goal is recouping their losses, not helping your financial situation.
  • Resist borrowing against the equity in your home as it may put your house at risk of foreclosure.
  • Don’t make a quick-trigger decision on the way you go about relieving yourself of debt. Consider all your options, seek financial counseling and find the one that best fits your financial needs.