Understanding the Different Forms of Debt Relief

As you consider bankruptcy, you might have heard about other forms of debt relief, such as debt settlement, debt consolidation, and debt management.

While these terms all sound very similar, there are important differences between them. You should understand how each of these programs works and how they might impact your life before making any decisions.

You should also understand how these programs stack up to bankruptcy, as well as what they can and can’t accomplish for you.

Here’s what you need to know.

Debt Settlement

While there are many debt settlement companies out there, it’s usually not necessary to use one. If there’s any chance a debt will settle, you can usually call the company up and take care of it on your own. 

Debts are most likely to settle when:

  • They are very old.
  • The company knows its chances of collecting the debt are very low.
  • The debt is already in collections.

Don’t expect “pennies on the dollar.” Most debt settlement offers range between 60% to 80% of the debt.

You may even receive a debt settlement offer from the creditor who currently owns the debt.

Settlement does get rid of your legal obligation to pay the debt, but you will take a significant hit to your credit score. The debt will be recorded as “settled for less than the total amount due.” That’s not a phrase future lenders wish to see.

Nevertheless, if you are struggling mostly with old collection debt and have the means to pay the settlements, it may be a good option. 

Debt Consolidation

Debt consolidation is a loan that you take out. You pay off your old debts with the new loan and begin making payments to the new lender. You’ll continue to pay interest on the balance, but the interest rates may be lower. The term of the loan could lower your payments and make some room in your budget.

Debt consolidation may be helpful for you if you still have the means to make the proposed loan payment, but may not help you if your credit is already too low for a debt consolidation loan. 

Debt Management

Consumer credit counseling agencies are nonprofit agencies that offer debt management programs. They also offer personal finance coaching and budgeting advice. They will generally work with your creditors to:

  • Lower your interest rates
  • Lower your monthly payments
  • Waive fees if possible

You may have to meet some conditions to enjoy the benefits of this program, including agreeing to pay off all your debt over a period of time. Usually, you’ll lump all your debts into one monthly payment. The credit counseling company will then distribute the payments for you. 

Be wary, though. Some credit counseling agencies aren’t very scrupulous. They don’t actually do any negotiation on your behalf and pay pennies to some of your creditors at a time. 

This means you could be marching towards a lawsuit while believing everything is fine. For debt management to work, you must continue to send payments that creditors will accept. You must also have the means to make the payments. 

When searching for a service, look for:

  • A good reputation
  • Certified credit counselors
  • Fee transparency
  • Free consultations and information about their services

You can review a list of the best credit counseling services for 2024 here.


Bankruptcy is the only debt relief method that gives you a fresh start. Any dischargeable debt will be wiped away after the process is complete. While you will take a hit for your credit, it is possible to completely revitalize your credit score after two years of focused work.

If you’ve reviewed the options and believe bankruptcy might be the best choice for you, give us a call. We’ll be happy to provide you with a free consultation and next steps.

See also:

5 Bad Ways to Manage Bad Debt

When Does It Become Absolutely Critical to File for Bankruptcy?

How to Rebuild Your Credit Score After Bankruptcy?


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