Debt relief options explained

Feeling buried by debt is common, and there is no single right answer for getting out. The best option depends on how much you owe, what kind of debt it is, whether you can keep up with payments, and how much your credit score matters to you over the next few years.

Start with a clear picture

List every debt with its balance, interest rate, minimum payment and whether you are current. Pull your free credit reports at AnnualCreditReport.com to make sure nothing is missing. Then compare your total minimum payments with what you can afford each month. That gap tells you which options are realistic.

Credit counseling and debt management plans

Nonprofit credit counseling agencies review your budget and options, often at no cost. If it fits, they may offer a debt management plan (DMP): you make one monthly payment to the agency, which pays your creditors. Agencies can often get card issuers to lower interest rates or waive some fees.

• Good for: credit card debt you can repay in full within a few years at a lower rate.
• Costs: usually a small setup fee and monthly fee.
• Trade-offs: enrolled cards are usually closed, and missing plan payments can end the concessions.

Consolidation loans and balance transfers

A debt consolidation loan is a personal loan used to pay off other debts, leaving one fixed payment and a set payoff date. It helps if the loan's APR is lower than what you pay now. A balance transfer card moves card balances to a card with a low or 0% intro rate, usually for a fee of a few percent of the amount moved.

• Good for: people with fair to good credit who can qualify for a lower rate.
• Trade-offs: both require a credit check. Running card balances back up afterwards can leave you worse off.

Our guide to comparing personal loans covers what to look for in the offer.

Debt settlement

Debt settlement companies try to get creditors to accept a lump sum that is less than the full balance. Typically you stop paying creditors and instead save money in a dedicated account until there is enough to offer a settlement.

• Good for: people already behind on large unsecured balances who cannot afford a repayment plan and want to avoid bankruptcy.
• Costs: a fee, often a percentage of the debt enrolled or the amount saved. Forgiven debt may count as taxable income.
• Trade-offs: late payments and settled accounts hurt your credit. Creditors may refuse to settle, add fees, or sue while you are in the program.

Bankruptcy

Bankruptcy is a federal court process. Chapter 7 can wipe out many unsecured debts but may require selling some assets, and you must pass a means test. Chapter 13 sets up a repayment plan, usually lasting three to five years, and can help you keep a home or car. You must complete credit counseling from an approved agency before filing.

Some debts, such as most student loans, recent taxes and child support, generally cannot be discharged. Bankruptcy can remain on your credit report for up to 10 years. Talk to a bankruptcy attorney before deciding. Many offer a free first consultation.

Red flags

• Fees charged before any debt is settled. For debt relief sold over the phone, the FTC's Telemarketing Sales Rule generally prohibits this.
• Promises to stop all collection calls or lawsuits, or to settle for a specific percentage.
• Claims of a "new government program" to erase credit card debt.
• Pressure to sign before you have read the contract and the full fee schedule.

Your state attorney general and the Consumer Financial Protection Bureau (CFPB) accept complaints about debt relief companies, and you can check for complaints before you sign up.

The bottom line

Start with the least drastic option you can realistically manage. If you can still pay, focus on lowering your interest rate. If you are already behind, talk to a nonprofit credit counselor and, if needed, a bankruptcy attorney before signing with a settlement company.