Debt Relief vs. Bankruptcy: How To Choose

If you’ve been juggling minimum loan payments for months, you may be starting to realize the debt isn’t going away on its own. At that point, two options usually come into focus: debt relief and bankruptcy.

While both can offer a way forward, they work very differently, and choosing the wrong one could mean more damage to your credit, higher costs or both. Here’s how to decide which path makes the most sense for your situation.

Debt relief is basically an umbrella term for ways to pay down or reduce what you owe without going to court (aka declaring bankruptcy), and it includes options like debt consolidation and debt settlement.

• Debt consolidation: You combine multiple debts into one single loan, ideally with a lower interest rate, so, instead of paying, say, three different creditors, you pay one. The idea is that through streamlining, you can make your one monthly payment and improve your credit, too. You still owe the full principal and you’ll have to qualify for the debt consolidation loan.
• Debt settlement: This involves negotiating with your creditors to accept less than what you actually owe. The negotiated amount that is settled on is paid as one lump sum. While debt settlement reduces your total amount of debt, it damages your credit and it comes with fees if you have a debt settlement company do the negotiating for you. Plus, the forgiven debt can be taxable.

Debt relief is the step you take to avoid bankruptcy. If you have decent credit, a debt consolidation loan can be an easy pivot that provides you with a new, simplified payment plan. A lender like Happy Money helps you stay motivated by providing a portal and mobile app where you can track your debt payoff progress. The personal loan application is pretty straightforward and you can take out anywhere from $5,000 to $40,000, with terms ranging from two to five years.

Debt settlement, on the other hand, can be a faster way to get rid of your debt completely, that is if your creditor agrees to it (and rather quickly), and if you have the funds to pay the agreed-upon lump sum. Here are some vetted debt settlement companies we recommend if this is the route you want to take:

• Chapter 7 bankruptcy: Chapter 7 can wipe out most unsecured debt, like credit cards and medical bills, in about three to six months. To qualify, your income has to fall below a certain threshold, and a trustee can liquidate “nonessential” things you own, such as a second car or valuables, to pay back creditors.
• Chapter 13 bankruptcy: Chapter 13 lets you keep more of what you have, including your home, but it puts you on a strict court-ordered repayment plan for three to five years. You need a steady income to qualify and missing a payment can get your case dismissed.

In either case, bankruptcy is a serious legal proceeding, and it can stay on your credit report for up to seven years (for Chapter 13) or up to 10 years (for Chapter 7).

If you’re not sure where to start, both the Financial Counseling Association of America (FCAA) and the National Foundation for Credit Counseling (NFCC) offer free consultations with nonprofit credit counselors who can walk you through your options without any pressure to commit.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every debt relief article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt relief and bankruptcy products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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