Key takeaways

  • Debt relief solutions cater to consumers who are overwhelmed with their outstanding debt balances.
  • 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. There are three primary types of debt relief: bankruptcy, debt settlement and debt consolidation.

While consolidation can be more of a debt management solution, it’s often an option that borrowers turn toward 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 is the process of combining multiple debts under a new personal loan or credit card to streamline and organize the repayment process. 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 pay one monthly payment. In the case of a debt consolidation loan, that monthly payment will be fixed.

Pros and cons of consolidation

Before making a final decision, consider both the pros and cons of consolidating your debt.


  • Can make repayment easier.
  • The possibility of a lower interest rate.
  • May help you pay off your debts faster.


  • Typically requires a good credit score for approval.
  • Potential up-front fees and costs.
  • Missing payments could be detrimental to your credit score.

When to consolidate your debt

After comparing lenders and prequalifying — a tool that some lenders offer that allows you to see your approval odds and predicted rates without impacting your credit score — you’ll have a better idea of if consolidation is right for you.

If you find a lender that offers a lower rate than your existing debts, has approval criteria you can meet and offers terms that work for your immediate and future finances, debt consolidation will likely be the right relief option for you.

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. Settlement, though often risky and expensive, 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, so you can expect your credit score to take a massive hit — sometimes decreasing as much as 100 points.

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 one through the debt settlement company that you control and have access to.

Pros and cons of working of settling your debt

Debt settlement isn’t a first-resort relief option. It may seem more convenient to work with a company that’ll work with creditors on your behalf, but it’s crucial to know both sides of debt settlement before signing on the dotted line.


  • Potentially faster repayment.
  • May be able to avoid bankruptcy.
  • Don’t have to work with creditors directly.


  • Potential for hefty fees.
  • Credit score damage.
  • Settlement isn’t guaranteed.

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 when it comes to taking care of overwhelming balances.


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, a 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.

Pros and cons of bankruptcy

Here’s what you need to know before filing for bankruptcy.


  • Some debts can be completely forgiven.
  • May prevent foreclosure or repossession.
  • Granted automatic stay.


  • May make it harder to get approved for credit in the future.
  • It will damage your credit score.
  • Filing can be expensive.
  • Luxury items you own may be seized.

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.

When to pursue debt relief

While third-party debt relief might not be the best first choice, there are times when you may want to consider it.

  • You’re having a hard time making your monthly payments.
  • You’re behind on high-interest credit card debt or loan payments.
  • You’ve tried debt payoff methods — like the avalanche or snowball method — to no avail.
  • You don’t think you’ll be able to make your payments in the near future due to a major life or career change.

Which debt relief option is best?

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

The relief method that has the most minimal impact on your credit score and helps you repay your debt the most efficiently is likely the best option for your financial future. However, before choosing a method, make sure you’ve explored and compared all of your options to make sure you’re choosing the method that will best benefit you in the long run.