Credit Counseling vs. Debt Relief vs. Bankruptcy: Which Path Is Right for You?

At a glance

• Credit counseling (DMP): Best if you can repay what you owe in full but need lower interest/fees and a structured 3–5 year plan.
• Debt relief (debt settlement): Best if you’re already behind (or about to be) and can set aside cash for lump-sum offers — but expect credit damage and the risk of collections/lawsuits.
• Bankruptcy (Chapter 7 or 13): Best when debt is truly unmanageable and you need legal protection and a reset (or court-supervised repayment).

You’re not alone if you’re seriously struggling with your debt. The Financial Health Network’s Financial Health Pulse® 2025 U.S. Trends Report found that 29% of households reported having an unmanageable amount of debt. Standard debt solutions like budgeting, earning more and using debt consolidation loans can help, but at some point, even those options aren’t enough.

The good news is that regardless of your financial situation, there are always ways to get rid of that debt. They each come with pros and cons, but if you understand your options and choose well, you can put yourself on the path to a brighter financial future. Let’s take a look at some of the most common options.

Credit counseling

Credit counseling agencies are non-profit organizations that offer a range of financial support options for the average American, especially when it comes to debt solutions. All credit counseling intake sessions are free and start the same: A live, one-on-one credit counselor will meet up with you online, over the phone or in person to go over your financial details and your specific concerns.

From there, they’ll direct you to the best financial options for your specific case, whether that’s foreclosure assistance, bankruptcy counseling or — quite often — a debt management plan. Signing up for a debt management plan is typically a three- to five-year commitment and usually requires you to close your credit cards.

You’ll make one monthly payment to the credit counseling agency, which will disburse it to each of your creditors until the debts are paid off in full. Although agencies typically charge $25 to $50 per month for this service (on a sliding-income scale), they’ll also negotiate lower interest rates with each of your creditors. As a result, most people see their monthly payments go down by 10% to 15% and save between 20% and 40% in the long run, according to a report from the non-profit organizations FinRegLab and the National Foundation for Credit Counseling. That said, credit counselors cannot reduce your overall principal balance — only the interest or fees that are charged on top of your debt.

Industry estimates show that most people (59% to 75%) who start a debt management plan are able to finish it and pay off all their consumer debt. It doesn’t work for all debts, though: like most of these options, secured debts like your mortgage and auto loan aren’t eligible. (Credit counselors, however, can still offer other debt support options for these things.)

Another benefit: You’ll generally preserve your credit score in the long run since you’re still paying everything off, albeit on a more friendly schedule.

As with any financial strategy, you’ll still want to do your due diligence. The Federal Trade Commission warns that it’s a red flag if a counselor pushes a debt management plan before doing a full review of your finances. It’s also always smart to contact your creditors and confirm they’re willing to make the adjustments called for in the plan before you agree to pay any associated fees, the FTC says.

Debt relief

“Debt relief” is a broad term, but most people use it when talking about debt settlement — i.e., negotiating with creditors to accept less than what you fully owe. You can DIY your own debt settlement, but many people choose to hire a professional debt relief company to do it for them.

If you hire a debt relief company, they’ll direct you to deposit money each month in a dedicated account in your name (sometimes administered by a third party), which typically charges a $5 to $10 monthly fee. This monthly deposit is often less than what you owe for your minimum debt payments. Once you have enough money saved up, the company will try to negotiate a lower settlement with each of your creditors. If a creditor accepts a settlement and you approve the terms, the money in your dedicated account is used to make settlement payments. Settlement fees are also collected at this time. Debt relief programs typically take two to four years to finish.

Federal rules prohibit debt relief companies from collecting their fee until they’ve successfully settled at least one debt and you’ve made at least one payment under that settlement. 

Creditors aren’t much inclined to accept a settlement if you’ve been making all of your payments on time, however, so this option works best for people who are already seriously overdue on their bills (or are likely to become delinquent anyway).

Even so, nothing says creditors have to negotiate, and some may instead choose to pursue collections activities, including suing people with overdue debts.

Still, most people who stick with debt relief do see results, saving an average of 32% after paying the debt settlement company’s fees (which can be up to 25% of your enrolled debt), according to a study for industry trade group, the Association for Consumer Debt Relief (ACDR) — formed May 1, 2025, when AADR and the Consumer Debt Relief Initiative combined). About a quarter of people are able to come to a settlement on all of their accounts, while another quarter of folks aren’t able to negotiate any debts, which could leave them with more fees, interest charges and credit damage than when they started.

You should also know that any forgiven debt from the settlements is generally considered taxable income, although important exceptions may apply (including insolvency or bankruptcy exclusions). A lender will often report canceled debt to you and the IRS on Form 1099-C.

Before pursuing debt relief, consumer watchdog groups caution that it’s extra important to make sure you have a clear understanding of how the process works as well as the potential payoff and downsides. You also want to be sure you’re working with a reputable company.

Bankruptcy

Many people’s debt is just too much to handle, period. Bankruptcy courts are generally able to help with unsecured debts such as credit cards, though in some limited cases, they can address some other types of debt, too.

Unlike credit counseling and debt relief, bankruptcy is a process that takes place in a dedicated court with a public paper trail. You can file a case on your own, but most people recommend hiring a bankruptcy attorney to boost your chances of success. It’s a complex process and you’ll need the help, starting with figuring out which type of bankruptcy case to file.

Federal law generally requires you to complete a credit counseling briefing from an approved nonprofit agency within 180 days before you file (with limited exceptions). After you file, you must also complete a separate debtor education course.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is what pops into most people’s heads when they think of “bankruptcy.” Under this scenario, a court-appointed trustee will sell all of your assets that aren’t reserved for you by state-specific laws. This means you may get to keep your house, for example, depending on the difference between how much equity you have in it and your state’s homestead exemption limit.

A Chapter 7 bankruptcy also offers a cleaner break with your debt: You can be free of it in just about four to six months. Many filers pay around $2,000 in attorney fees (often more once you include required courses and other costs), and the current Chapter 7 court filing fee is $338. It will impact your credit for longer than any other debt resolution option, however, staying on your credit report for the next 10 years before falling off. In comparison, other negative marks disappear after seven years. While most people who file Chapter 7 bankruptcy are able to have their debts discharged, not everyone is eligible for it. You’ll need to pass the means test (or qualify for an exception) based on income and allowable expenses.

Chapter 13 bankruptcy

A Chapter 13 bankruptcy, on the other hand, looks more like a debt management plan than anything else. You’ll be funneled into a three- or five-year repayment plan, making monthly payments to your creditors. The long process is one of the major downsides; in fact, about 38.8% of Chapter 13 cases in an American Bankruptcy Institute analysis of cases closed in fiscal years 2010-2016 ended with a completed plan and discharge.

You’ll generally get to keep your assets; you won’t be forced to sell them like in a Chapter 7 bankruptcy. Most people will still see a major credit hit after filing bankruptcy. In practice, Chapter 13 bankruptcies generally remain for about seven years — usually measured from the filing date.

You pay for that benefit — literally — in the form of higher attorney fees, however, since it’s a more complex legal case. Most people end up paying around $3,200, on average, in attorney fees alone. (Beware of skipping the bankruptcy attorney, though; without one, the success rate plummets from 41.4% down to a mere 2.3%, according to a report from the American Bankruptcy Institute.) The current Chapter 13 court filing fee is $313. Those who stick with the program will see a bright spot at the end of the tunnel, though: all remaining eligible debts at the end of the three- or five-year process will be forgiven.

Which path is right for you?

Choosing between credit counseling, debt relief and bankruptcy depends on your financial situation and priorities — and it’s important to understand how each works before you make a decision. If you need help budgeting and organizing your debt into a more feasible bill, then a debt management plan offered through a credit counseling organization may be enough to get you back on track.

But if you’re dealing with a more overwhelming debt load — and particularly if you’ve had a financial hardship — there may be a better solution. For borrowers whose income is low relative to how much they owe, filing for Chapter 7 bankruptcy is often the quickest path to get rid of debt. If you don’t meet the qualifications for that, then negotiating with your creditors, either on your own or through a debt relief company, may also be a smart move.

This story was originally published February 26, 2025 at 8:34 AM.