Debt Relief vs Bankruptcy: Which Is Right for You?

Anyone struggling with overwhelming debt — and many Americans are, with household debt hitting a record $18.39 trillion — surely must be contemplating a surefire way to relieve the sense of drowning.

The main options are debt relief or bankruptcy. Debt relief helps you slowly work your way out of debt, while bankruptcy offers a faster but more drastic solution through the courts.

But these choices are also nuanced: Both debt relief and bankruptcy overflow with subtleties that demand inspection and comparison.

Accordingly, the path to your fresh start should not be chosen hastily.

What Is Debt Relief?

Debt relief is a broad term for programs or strategies that help make debt more affordable and easier to pay off. It can involve lowering interest rates, reducing the total amount you owe, or combining multiple debts into one manageable payment.

Common forms of debt relief include credit counseling and a debt management plan (DMP), debt consolidation, and debt settlement.

Bankruptcy is sometimes grouped under “debt relief,” but because it’s a court process with different rules and outcomes, we cover it separately below.

No matter which option you choose, the goal of debt relief is to lower your monthly stress, manage your payments, and move toward long-term financial stability.

Non-Bankruptcy Debt Relief Options

Debt relief is nothing if not flexible. Methods for relieving debt burdens besides surrendering to federal bankruptcy court include options for do-it-yourselfers, those who want coaches, and consumers eager to leave developing a strategy and executing the details to experts.

Credit Counseling & DMP

Credit counseling is for debtors who want financial experts to take the lead. Your certified counselor will review your spending habits, credit and debt level, develop a new budget wrapped in a relief plan, and, with your consent, will help put the strategy into action through creation of an affordable debt management plan (DMP), a form of debt consolidation with a structured repayment plan.

In a DMP, credit card payments get bundled into a single, affordable monthly payment (including the agency’s management fee). Completion of the DMP, erasing all the included debts, typically requires three to five years.

DMPs and Chapter 13 bankruptcy, or “wage earners’ bankruptcy,” bear remarkable similarities and, as a result, are frequently compared. In each, a repayment plan is developed in consultation and negotiation with creditors; a single monthly payment paid by the debtor is distributed to creditors by an intermediary; and at the conclusion of the plan, the consumer is free of the bundled debt.

Two differences between DMPs and Chapter 13 bankruptcy stand out:

1. As a court action, bankruptcies are a public record. Moreover, bankruptcy punishes credit scores more harshly than DMPs.
2. Also noteworthy: Since the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, U.S. consumers are obliged to complete pre-file credit counseling through a court-approved agency within 180 days before filing for bankruptcy.

Debt Consolidation

As its name suggests, debt consolidation is consolidating multiple debts and replacing them with one combined larger debt with the goal of making payments more manageable and affordable. The process involves taking out a new loan, usually at a lower interest, and using it to pay off the other existing smaller debts. That leaves you with only one monthly bill to handle.

You can merge your debt in several ways, including a debt consolidation loan, transferring your credit card debt to a no-interest or low-interest credit card, securing a home equity loan, or getting a home equity line of credit (HELOC).

All these options can result in a lower interest rate — if you qualify. Although the loan payment may be lower than the sum of your monthly minimums, before signing, make sure to weigh the amount saved in interest vs. the fees that typically come with debt consolidation.

One cautionary note: Debt consolidation loans repackage your unsecured debt; the principal is not reduced. Additionally, your ability to secure a competitive rate may be hampered if you’ve already fallen behind in your payments, or if your credit is poor.

Also, after you sign an agreement, you must maintain timely payments on the new loan to avoid causing more damage to your credit. You also should stash your zeroed-out cards in a box in a forbidding corner of your attic or basement and delete them from your digital wallet. A debt consolidation loan is not an excuse to rev up your credit card spending.

Debt Settlement

Never confuse debt settlement — also known as debt negotiation and debt arbitration — with credit counseling or debt management programs. In debt settlement, you (or your representative) ask your creditors (credit card companies, medical collections agencies) to accept part of what you owe as payment in full.

Having available cash and the ability to make a one-time partial payment will help your negotiations. Creditors have accepted 40% to 70% of the balance to write off the remaining debt.

Many times, however, cash is not an option. People can turn to debt settlement companies for help. These companies:

• Put their clients on a budget.
• Order them to make no more payments on their unsecured (credit card, medical, personal loan) debt.
• Order regular deposits to be placed in an escrow account.
• Use accumulated money to make an offer to settle the debt.
• Pay themselves. Debt settlement company fees could be as much as 25% of your original debt.

Is debt settlement a good idea? That depends. Debt settlement is a long process and will damage your credit score, but you can come out in the end with no debt.

Wait. There’s more. Forgiven debt may be considered taxable income by the IRS. You’ll get a Form 1099-C that must be filed with your taxes. Also, unlike entering into a debt management plan or filing for bankruptcy, while it’s ongoing, the debt settlement process does not stop collections efforts or lawsuits.

If you remain determined, research the company you pick to do business with.

“Not all debt settlement companies are created equal,” says credit industry analyst Greg Mahnken of Liverpool, N.Y. “Read reviews and understand all of the costs and terms of your agreement before enlisting a debt settlement company to help you.”

Pros and Cons of Non-Bankruptcy Debt Relief Options

Non-bankruptcy debt relief offers workable solutions and fresh starts for those struggling to manage monthly obligations. However, debt relief can have many downsides, including credit damage, tax consequences, fees, and penalties. Here is a detailed look at the pros and cons of non-bankruptcy debt relief.

Pros of Debt Relief

• Avoiding bankruptcy: Debt relief offers a way to manage debt without resorting to bankruptcy, which can have more severe and long-lasting consequences.
• Lowering interest rates and monthly payments: Some debt relief options, such as a consolidation loan or a debt management plan, can reduce the amount of interest you owe or secure a reduced monthly payment.
• Faster debt resolution: Debt relief programs such as debt consolidation can help you become debt-free faster than if you continued making minimum payments in your current situation.
• Professional assistance: Credit counseling and debt management programs guide you on how to build an affordable budget, tame your spending habits, clean up your credit reports, and explore different debt relief options for your long-term financial well-being.
• Access to free help: Although some organizations charge a fee for certain services, nonprofit organizations offer credit counseling at no charge.

 Cons of Debt Relief

• Potential credit score damage: Debt settlement, especially, can lower your credit score. Even if you eventually clear the debt, your decision remains on your credit report for several years and can make it difficult to get approved for loans at competitive rates in the future.
• Fees for debt relief services: Most debt relief services come at a fee. Besides the fees on services and financing products, in the case of debt settlement, you might also be on the hook for late fees, interest charges, and other penalties.
• No guarantee: Although lenders usually are willing to work with you to resolve debts, they’re under no obligation to do so. In particular, there’s zero guarantee that creditors will agree to your terms of debt settlement.
• Tax consequences: If a creditor forgives all or part of your debt of more than $600, the IRS considers the forgiven debt amount as income, which must be declared when you file. Affected creditors are required to send you a form 1099-C, which shows the original balance and how much debt it forgave.
• Potential for increased debt: Unlike the terms of debt management plans, during the negotiation period of a debt settlement program, interest and penalties may continue to accrue, increasing your overall debt.
• No legal protection from creditors: Again, our attention is focused primarily on debt settlement. Consolidation and DMPs rarely create difficulties for creditors. And bankruptcy ends creditor legal actions on the day it’s filed. But while debt settlement negotiations lurch toward uncertain resolutions, creditors may still take legal action, up to and including filing lawsuits.
• Creditor participation is voluntary: Once more, we’re mostly hacking through the thicket of debt settlement. Unlike a DMP, which front-loads agreement between the debtor and creditor, debt settlement requires the eventual cooperation, if not goodwill, of the creditor. To that point, no law requires compliance. Your results may vary.

What Is Bankruptcy?

Bankruptcy is a legal process that helps people and businesses discharge or restructure debt when repayment isn’t workable. It has serious credit and legal implications, so it’s typically a last resort.

Types of Bankruptcy

For individuals, there are two primary types of bankruptcy, Chapter 7 and Chapter 13. Filing for bankruptcy involves petitioning a bankruptcy court (usually through an attorney), then undergoing a means test to determine if you qualify.

Chapter 7 Bankruptcy

Chapter 7 filings, (liquidation bankruptcy) usually are what come to mind when we ponder bankruptcy. And there’s a lot of it going around: The American Bankruptcy Institute found Chapter 7 filings surged 15% in the first half of 2025, to 163,219.

How to get the process started: Gather bank statements, loan documents, pay stubs, and credit card statements and fill out a bankruptcy petition, statement of financial affairs, payment schedules, and other required documents. These are filed with the court, along with a $338 filing fee.

Most Chapter 7 filers are subject to a bankruptcy means test. Exceptions include certain veterans and active military personnel. Otherwise, you’ll likely have to pass the weighing of your gross income for the six months preceding your bankruptcy filing.

If your earnings put you above your state’s median, you then must calculate your disposable income by subtracting allowed monthly expenses. High disposable income suggests you could repay at least some of your unsecured debt over five years, making you a candidate for Chapter 13 or a debt management plan.

Once approved, a court-appointed trustee sells your assets, except for certain exempt properties kept to aid your fresh start. Sale proceeds are distributed to creditors who filed legal claims to your debt. However, the vast majority of most Chapter 7 cases result in no assets being sold.

In the end — roughly three to six months — the debts addressed by your straight/liquidation bankruptcy (again, exceptions apply) vanish.

“Bankruptcy,” says attorney and CEO of LegalAdvice.com David Reisher, “provides considerable relief for anybody overwhelmed with unsustainable levels of debt.”

Chapter 13 Bankruptcy

In Chapter 13 bankruptcy — also called a wage earner’s plan — consumers don’t have their debts wiped clean. Instead, debts are reorganized under a repayment plan that stretches from three to five years. Some creditors may be repaid in full. Some may not.

Like a debt management plan, a Chapter 13 bankruptcy pays a monthly sum to a trustee, who distributes payments to creditors according to priorities set by the court. Unlike a DMP, Chapter 13 creates a public record.

On the plus side, Chapter 13 is ideal for people who, despite unmanageable debt, have a steady income and want to catch up on their secured (homes, cars, land, etc.) debt.

“Because you pay back at least some of what you owe, it’s considered a bit more respectable when you apply for credit in the future,” says Gina Pogol, a personal finance specialist with MoneyRates.com. “Chapter 13 bankruptcy offers all of the benefits of a debt settlement plan, but you also get tax-free debt forgiveness, all interest and fees stop piling up, collection efforts stop and when you’re finished, you are free of debts.”

Unlike Chapter 7, in which certain nonexempt valuables may be sold to satisfy creditors, Chapter 13 filers’ possessions are protected under the law.

Pros and Cons of Bankruptcy

While bankruptcy offers a fresh financial beginning for people overwhelmed by debt, it also brings substantial consequences. Here is a closer look at the pros and cons of filing for bankruptcy.

Pros of Bankruptcy

• A fresh start. Most debtors who file for bankruptcy have no viable way to repay their debt. Filing for bankruptcy allows you to discharge most of your unsecured debts, thus giving you a clean slate to rebuild your finances.
• Immediate relief. Upon filing for bankruptcy, the court issues an automatic stay, which stops creditors from making further collection attempts on your debts. The stay gives filers much-needed relief from having to deal with overbearing creditors.
• Protection from creditors. The automatic stay also provides temporary legal protection from foreclosure, eviction, further wage garnishments, other legal action and car repossession. Any wages you earn after filing for bankruptcy are not part of the bankruptcy estate and thus cannot be used to repay creditors for any discharged debt. You may also protect key assets, such as your retirement savings and personal items.
• Covered debts will be discharged. These include medical debt, personal loans and credit card balances. Most debt relief strategies include paying off all or some portion of such debts.

Cons of Bankruptcy

• Long-term credit damage. Filing for bankruptcy is one of the most damaging events that can befall your credit. Plainly put, it shows that you cannot honor your obligations. This failure remains on your credit report from seven years (Chapter 13) to 10 years (Chapter 7), which might make it difficult to get credit in the future.
• Damage to your financial reputation. Bankruptcy filings are public records, which can affect your personal and professional reputation, including your ability to get certain jobs or even rent some apartments. Moreover, credit-rebuilding services (some of them shady) will contact you by using the public record of your bankruptcy.
• Loss of assets. While bankruptcy protects exempt assets such as your house and personal effects, Chapter 7 requires all nonexempt assets be sold to repay creditors. In Chapter 13, although you get to keep your assets, the value of nonexempt and luxury assets is used to negotiate a repayment plan.
• Eligibility is limited. To qualify for bankruptcy, you need to pass a means test. Not everyone can discharge their debt under bankruptcy.
• Limited availability. You can file for bankruptcy only once every eight years under Chapter 7 and two years under Chapter 13.
• Not all debts are dischargeable. Under bankruptcy, certain debts stick, including student loans, child support, and recent taxes.
• Bankruptcy can be expensive. Filing for bankruptcy almost certainly requires hiring an attorney and paying court fees upfront, which can be pricey.

Key Differences Between Debt Relief and Bankruptcy

There are key differences between bankruptcy and debt relief to be aware of. The biggest differences between bankruptcy and alternatives to bankruptcy are:

 Factors to Consider When Choosing Between Debt Relief and Bankruptcy

If you face the decision of choosing between debt relief and bankruptcy, consider some key factors.

Consider these differences between debt relief and bankruptcy:

• Amount of debt: If your debt is relatively manageable, debt relief might be more appropriate for you. However, if you are facing overwhelming debt that you have no conceivable way of repaying, even after your interest rates are lowered or your principal balances shrunk, bankruptcy might be the better choice.
• Income level: Your level of income affects your eligibility for bankruptcy and your ability to complete a debt relief program. While having a higher and stable income might disqualify you from Chapter 7 bankruptcy, it could make you a viable candidate for Chapter 13 bankruptcy or debt relief programs. If your income is limited or unstable, Chapter 7 bankruptcy might be more suitable.
• Asset protection: If you own significant assets you want to protect, such as a home with substantial equity, cars, savings, investment accounts, and other valuables (such as expensive jewelry or collections), debt relief or Chapter 13 bankruptcy might be preferable to Chapter 7, which requires liquidation of nonexempt assets.
• Long-term financial goals: Although both options dent your credit score, bankruptcy’s impact is more severe. Bankruptcy hammers your score, and remains on your report for seven to 10 years. Future loan applications, housing options, and even employment or promotion opportunities are likely to be affected.
• Legal implications: Bankruptcy provides legal protections that debt relief programs do not offer. If you are facing wage garnishment or harassment and lawsuits from creditors, the automatic stay that comes with bankruptcy might be valuable.
• Types of debt: Bankruptcy is effective for discharging unsecured debts such as credit cards, personal loans and medical bills. However, it cannot discharge certain types of debt, including student loans, child support and recent taxes. If these describe much of your debt, debt relief programs might be a better bet.

Most importantly, remember there is no “one-size-fits-all” solution to conquering debt. Circumstances play a central role in determining each debtor’s best course of action. Given the complexity and severe long-term consequences of both debt relief and bankruptcy, it is wise to seek professional guidance to make an informed decision.

Consider consulting with a nonprofit credit counseling agency, a financial advisor, a bankruptcy attorney, or some combination of all three. Most initial consultations are free and without obligation.

Real-Life Scenarios: Which Option Works Best?

As discussed above, debt relief and bankruptcy operate in significantly different ways. To help provide the superior off-ramp from your personal Crushing Debt Expressway, here are a few real-world situations.

• You have $15,000 in credit card debt, a stable job and reliable income, but you’re making little headway reducing the balances. Consider a debt management plan or debt consolidation.
• You’ve run up $80,000 in unsecured debt, you’ve lost your job and income, your savings are gone and you’re a renter. Chapter 7 probably is your best bet.
• You’re behind on your mortgage but you’re employed by a thriving business and you can count on your income. All you need is breathing room to reorganize your finances, making you an excellent Chapter 13 candidate.
• You own and operate a well-established business that’s firmly in the black; you have a few acres in the mountains where you plan to put a getaway cottage; and you inherited a vintage Corvette and a valuable coin collection. Your credit rating remains good, but lately your lifestyle has outstripped your income, and you’ve run up considerable credit card debt. You’ve considered filing Chapter 13 to get reorganized while protecting the valuables you cherish, but bankruptcy could make your employees and customers nervous. Consult with a credit counselor or money manager.
• You’re employed by the government in a job in which you oversee financial transactions. Your performance reviews have all been top-notch, and you’re on the fast track for promotion into management. But keeping up with student loan payments means you’ve been putting too many monthly expenses on credit cards, and you have been late a few times in recent months. Now you can’t sleep nights worrying about how you’re going to keep up. Chapter 13 might be the right choice if you’re in arrears across the board, but any form of bankruptcy won’t look good to your agency’s management, which has to worry about public perceptions. Your situation has debt management or debt consolidation written all over it.

Choosing the Right Debt Solution for Your Situation

Simply put, if you can make it work, most forms of debt relief are far superior to bankruptcy in virtually every way. (We’ll make an exception for the tightrope walk that is debt settlement.) Generally, debt relief is better for your credit score, better for your reputation, better for your financial prospects — short-term and long.

Again, however, circumstances dictate the best option for you.

Debt relief may be right for you if you have substantial high-interest debt; your credit score hasn’t gone over the cliff; your job and income are reliable; your primary motivation is to lower interest charges; your debts simply need reorganizing; and you can stick to a plan that may require strict budgeting over three to five years. Also, if you prefer to fix your finances in a way that doesn’t create a public record, debt relief is for you.

Chapter 7 bankruptcy may be right for you if your income is uncertain, intermittent, or otherwise problematic; you’re enduring financial hardship; your credit score has plummeted into the low 600s or below; other debt relief options haven’t worked out; you’re facing foreclosure or repossession; you have few nonexempt possessions, or possessions you’re desperate to protect, and you want a fresh start as soon as possible.

Chapter 13 bankruptcy could be your ticket out if you have a reliable job and steady income, but you need to protect assets while you reorganize your debt load.

Do not imagine you have to sort all of this out on your own. Strongly consider consulting with a credit counselor for a free debt analysis.

Common Myths About Bankruptcy and Debt Relief

No one strives to have their lives snarled by financial upheaval, but as noted above, with household debt at record levels and interest rates stubbornly high, millions of Americans are either in serious money trouble, or are trundling toward the brink. Personal bankruptcies topped 519,000 in the 12 months ending June 30, 2025, an 11.8% increase.

Making things worse, the most common methods of fashioning an escape are burdened by myths and misconceptions. Let’s unwind some of these financial finger traps.

• Bankruptcy ruins your life forever. Although bankruptcy stays on your report up to 10 years, with careful management of your budget, your credit can begin to rebound within a year or two.
• Bankruptcy filers are financially irresponsible. Not so fast. Personal bankruptcy and personal failure are sometimes related, but filings are far more often the result of unforeseen events: divorce, severe illness and job loss. People financially ambushed by life deserve the fresh start bankruptcy offers.
• Debt settlement is fast and easy. Guess again. Debt settlement — attempting to get creditors to accept less than what they’re owed by offering lump sums — can take years, will damage credit, does not stop collections efforts, and can tax the debtor’s mental health.
• You’ll lose everything if you file bankruptcy. Chapter 13 filers have their valuables protected while they work through their court-established program. And despite its sinister epithet — liquidation bankruptcy — most Chapter 7 filers (more than 93%) keep their possessions.

All that’s left is to decide which path is best for your situation. Once you have done the homework and the consultations, you’ll be ready to get on with the decision that’s bound to make your life better, happier, and more successful.