Debt Relief Options Compared: What Each One Really Does

The short answer: there are five main ways out when debt gets too heavy: paying it down yourself with a plan, a consolidation loan or balance transfer, a debt management plan through a nonprofit credit counselor, debt settlement, and bankruptcy. They are listed roughly from the least risk to the most. Settlement and bankruptcy can cut what you owe, but they cost the most in credit, fees and risk. Start at the top and move down only when the option above it cannot work.

This page is educational only, not financial or legal advice. Rules and fees change, and your situation is your own. Before you sign anything, talk to a qualified professional: a nonprofit credit counselor, a tax advisor for questions about forgiven debt, or a bankruptcy attorney or legal aid for anything legal. We do not recommend or work with any debt relief company.

Debt relief options compared

First: can you cover your minimum payments?

This one question sorts most people. If you can pay every minimum and still have even a little left over, you probably do not need a debt relief company at all. A plan you run yourself costs nothing and does not touch your credit. If the minimums are already more than you bring in, the options further down this page become real choices, and a free or low-cost conversation with a nonprofit credit counselor is a sensible next step.

Either way, call your card companies before you fall behind. Some issuers have hardship programs or payment plans, and you will not hear about them unless you ask.

1. Your own payoff plan

You keep paying every minimum and put every extra dollar on one debt at a time. Two orders work. The debt snowball method pays the smallest balance first for quick wins. The avalanche pays the highest rate first and costs less interest. The snowball vs avalanche calculator shows both on your own debts.

This is the option most people skip because it sounds too simple, and it is the one with no fees, no credit damage and no one to trust but yourself.

2. Debt consolidation: a loan or a balance transfer

The CFPB describes a debt consolidation loan as money you borrow to repay your separate loans so you pay back just one amount. It helps when the new rate is clearly lower than what you pay now. The CFPB also warns that you might pay more overall with a consolidated loan, and that a low rate could be a teaser rate that only lasts for a limited time.

A 0% balance transfer card works the same way for card debt, with a transfer fee up front and a promo that ends. Both only help if the old cards stay at zero afterward. Run the numbers before you apply:

• The debt consolidation calculator compares a loan, with its fee and term, against paying your cards as they are.
• The balance transfer calculator tells you whether a transfer saves money after the fee and whether you pay it off inside the promo.
• Lenders look at your debt-to-income ratio. Our debt-to-income calculator shows yours, and if you were turned down, read what to do after a consolidation loan is denied.

3. Credit counseling and debt management plans

Credit counseling organizations are usually nonprofits that advise you on your money and debts and help with a budget, according to the CFPB. A counselor may suggest a debt management plan. Under one, you make a single payment to the counseling organization each month and it pays your creditors. The FTC says your creditors may agree to lower your interest rates or waive certain fees, and that a successful plan requires regular, timely payments and can take 48 months or more.

A debt management plan does not erase debt; you still repay what you owe. What it can change is the rate, the fees and the number of bills. Things to know before you sign up:

• Nonprofit does not mean free. Counselors are allowed to charge fees. The FTC's advice is to ask how much you will pay and to get all fees in writing.
• A good counselor looks at everything first. The CFPB says to avoid organizations that push a debt management plan as your only option.
• Confirm with your creditors. The FTC has found that some organizations offering debt management plans have defrauded people. The CFPB's advice is to contact your creditors and confirm they accepted the plan before you send any payments.
• Check the organization. The CFPB suggests checking a counseling organization with your state attorney general and local consumer protection agency.

The official places to start looking are the CFPB's page What is credit counseling? and the FTC's How to get out of debt.

4. Debt settlement

Debt settlement companies, usually for-profit, offer to negotiate with your creditors so you pay less than you owe. The CFPB says they typically have you save up money for lump sum payments and usually advise you to stop paying your creditors while they negotiate. That is where most of the risk comes from:

• Your credit takes the hit. The CFPB says using debt settlement services can have a negative impact on your credit scores and your ability to get credit in the future. While you are not paying, late fees and interest keep adding up.
• You can be sued. The CFPB warns that working with a debt settlement company may lead to a creditor filing a debt collection lawsuit against you. Not every creditor agrees to settle.
• Forgiven debt can be taxed. The IRS says canceled debt is generally taxable, and a creditor may send you a Form 1099-C. There are exclusions and exceptions, such as debt canceled in a bankruptcy case or to the extent you were insolvent, and some of them come with paperwork of their own. The IRS explains them in Topic 431, Canceled debt. A tax advisor can tell you where you stand.
• Fees come out of the savings. The FTC's Telemarketing Sales Rule covers for-profit debt relief companies that sell their services by phone, including when you call them after seeing an ad; according to the FTC, nonprofits and companies that meet you face to face before you sign up are generally outside it. Within the rule, a company cannot collect a fee until three things are true: it has settled or changed the terms of at least one of your debts, there is an agreement between you and the creditor, and you have made at least one payment to the creditor or collector under that agreement. For the rest, including how the fee is split across your debts and the rules for a dedicated savings account, see the FTC's guide to the rule.

Red flags the CFPB lists: a company that charges any fee before it settles your debts, promises a set percentage reduction, talks about a "new government program" to bail out credit card debt, guarantees your debt will go away, tells you to stop talking to your creditors, says it can stop all collection calls and lawsuits, or promises your debts paid for pennies on the dollar. To the best of our knowledge, there is no government program that pays off people's credit card debt.

The CFPB also notes you can negotiate with a creditor or collector yourself, without paying a company to do it. If collectors are already calling, our guide to your rights with debt collectors explains what they can and cannot do.

5. Bankruptcy, as a last option

The FTC calls bankruptcy generally a last option because of its long-term negative impact on your credit. How long it shows depends on the chapter and on the credit bureaus' practice. Federal law lets a bankruptcy be reported for up to 10 years (15 U.S.C. 1681c(a)(1)), and the CFPB says bankruptcies can stay on your report for up to ten years. Experian says a Chapter 7 bankruptcy stays for 10 years from the filing date and a Chapter 13 for seven years from the filing date; the accounts included in a bankruptcy follow their own seven-year timelines. There are two common types for individuals. Chapter 7 is known as straight bankruptcy and can mean selling property that is not exempt. Chapter 13 generally lets people with a steady income keep property such as a house or car, under a court-approved plan to pay some of their debts in three to five years.

You must get credit counseling from a government-approved organization within six months before you file, and take a separate debtor education course after filing to receive a discharge, with limited exceptions. The U.S. Trustee Program keeps the list of approved agencies. Bankruptcy law is complicated and what you can keep depends on your state, so this is a decision to make with a bankruptcy attorney or legal aid. Some bankruptcy attorneys offer a free first consultation, the CFPB notes.

How to choose, in plain terms

1. Write down every debt with its balance, rate and minimum. The real numbers often show the problem is smaller, or bigger, than it feels.
2. If the minimums fit your budget, build your own plan and look for a lower rate with a balance transfer or consolidation loan.
3. If the minimums do not fit but the debts could be repaid at lower rates, talk to a nonprofit credit counselor about a debt management plan.
4. Look at settlement or bankruptcy only after that, with the risks above in front of you and a qualified professional on your side.

Whatever you choose, a high-interest payday loan to cover a bill usually makes the hole deeper. Our guide on getting out of payday loan debt covers that one.

More on this topic: Debt Help: Where to Start When You Owe Too Much