Key takeaways

  • While debt relief solutions may be helpful when organizing and paying down debt, they can easily result in credit or financial damage.
  • The most common forms of debt relief are debt consolidation, debt settlement and bankruptcy.
  • To decide which debt relief option is best, evaluate how it’ll impact your credit score and long-term financial health.

Debt relief is the process of reorganizing your debts to make repayment more streamlined, simple or affordable. Three primary types of debt relief are bankruptcy, debt settlement and debt consolidation.

While consolidation can be more of a debt management solution, borrowers often turn toward it for relief. Debt settlement should be considered a last-resort management option, with bankruptcy only considered when no other option is available.

Debt consolidation

Who it’s best for
Borrowers with multiple high-interest debts and good credit score — or a co-signer — who can score a lower credit score or more favorable terms.

What is debt consolidation?

Debt consolidation combines multiple debts under a new personal loan or credit card to streamline and organize repayment. However, it usually only makes sense to consolidate your debts if you qualify for a lower rate on your new debt than what you had on one or more of your previous debts.

Debt consolidation also can make the repayment process easier. Instead of having multiple payments due at different times during the month, with a debt consolidation loan you’ll only have to make one monthly payment. In the case of a debt consolidation loan, that monthly payment will be fixed.

When to consolidate your debt

When trying to figure out if consolidating is best for you, start by prequalifying with multiple lenders. Prequalification lets you see your predicted interest rates and eligibility odds before applying, so your credit isn’t impacted.

After comparing multiple offers, if you find a lender that meets your needs and offers lower rates than your existing loans, then debt consolidation may be a helpful debt payoff method. However, only apply or accept the loan if you’re certain you’ll be able to comfortably make the monthly payments for the entirety of the term.

Debt settlement

Who it’s best for
Borrowers who don’t qualify for debt consolidation, don’t wish to file for bankruptcy and have exhausted all of their other relief options.

What is debt settlement?

Debt settlement involves working with a third-party settlement company to resolve your unpaid debts. Though often risky and expensive, settlement takes the work out of negotiating with and paying the creditors directly.

While this may seem like an ideal option, creditors are under no legal obligation to work with settlement companies. Plus, you’ll have to stop making payments to your creditors once you start working with a debt settlement company. When you stop making payments, it severely impacts your score. You can expect your credit score to take a massive hit when working with a settlement company. Depending on your circumstances and debt, it could be as severe as a 100-point drop.

Once you’re approved for settlement, the company will work to negotiate your debts and handle the repayment process. You’ll be responsible for depositing a monthly payment on time and in full in a secured account — usually through the debt settlement company you control and have access to.

When to work with a debt relief company

When there are no other options available and you don’t wish to turn to bankruptcy, settling your debts may be the best — and only — option for taking care of overwhelming balances.

Credit counseling

Who it’s best for
Borrowers struggling to pay off their debts or anyone needing financial guidance.

What is credit counseling?

Credit counseling is a free or low cost option that helps consumers get a better handle on their debt. Often offered by nonprofit organizations or agencies, you’ll be partnered with a credit counselor who will review your finances to help you find debt relief solutions.

For example, a counselor may advise you to start a debt management plan (DMP), a three-to-five-year plan designed to help you get out of debt sooner.

Credit counseling can also help you stay on the right financial track well into the future. Most agencies also provide services to help you manage your income and everyday expenses, as well as providing immediate debt relief options.

When to pursue credit counseling

Credit counseling can be helpful in every stage of your debt repayment journey, especially if you’re unsure of your options or where to start.

Debt management

Who it’s best for
Borrowers who are having difficulty paying off unsecured debt.

What is debt management?

Debt management involves using financial tools and planning to help lower — and eventually eliminate —  your current debt. You can go through a credit counseling agency, or you can set up a management plan yourself.

Self-lead debt management

DIY-ing your version of a debt management plan often involves employing repayment methods, like the avalanche and snowball methods. For those who have a handle on their spending habits and are confident in communicating with creditors, this may be a good relief option.

Forgoing a credit counselor can help you save money in agency fees and allows you to create a plan tailored specifically to your spending habits. However, counselors are helpful in that they may see opportunities for more effective repayment strategies and have professional experience when negotiating with creditors.

Credit counseling

Counselors take the heavy lifting off of your shoulders when creating a plan with your creditors. If your creditors agree to your counselor’s request, you could have some of your debts lessened or eliminated altogether.

Like with debt settlement, you’ll be assigned an account by the credit agency. Instead of paying your creditors directly, you’ll deposit the payments into your account. This payment is typically required monthly and you’ll likely also have an agency fee tacked on to your debt payment amount.

When to consider debt management:

If you want a plan that looks at your entire financial profile and all of your existing expenses, you may want to consider setting up a debt management plan.


Who it’s best for
Those with high amounts of debt with no other way to pay down their balances.

What is bankruptcy?

Bankruptcy is the legal process of disputing outstanding debts or financial obligations. Once approved by a judge and court-appointed trustees, you can either qualify for Chapter 13 or Chapter 7 bankruptcy. While it may sound similar to settlement, the main difference is that you’ll be granted a stay during the process, meaning that creditors legally can’t take action until the process is over.

Bankruptcy does offer a fresh start to those with unmanageable delinquent debts — but it comes with some major risks. For one, your assets are measured during the process and may be seized to satisfy a portion of the delinquent debt.

What’s more, bankruptcy remains on your credit report for up to 10 years, which significantly reduces your score and makes it harder to get approved for other products in the future.

When to declare bankruptcy

Declaring for bankruptcy should be a last-resort decision due to the potential costs and the long-term financial consequences. Declaring bankruptcy may be the best solution if you have large amounts of unpayable debt, are at risk of losing essential assets — such as your car or home — and don’t qualify for other forms of relief.

Which debt relief option is best?

There isn’t any one single best debt relief option. What’s best for you ultimately depends on the amount of debt you have and how long you’ve been unable to repay your balances.

The relief method that’s considered ‘best’ is individualized for every borrower. However, the method that is most efficient in paying down your debt while having the smallest impact on your credit is likely the best option for you. Just remember that most debt relief options aren’t immediate and will need to fit your long term financial goals.

That being said, make sure you’ve explored all of the relief methods and have considered the full impact of each option before making a final decision.