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Debt management, debt settlement or bankruptcy?

On Behalf of | Apr 9, 2021 | Firm News

If you live with overwhelming debt, you have a few debt relief options. “Overwhelming debt” is debt on which you routinely fail to make progress despite your best efforts.

Debt relief programs were designed to help debtors break free of the costly and often debilitating cycle of oppressive debt. That said, not all debt relief programs are right for you. NerdWallet explores the three most common options — debt management, debt settlement and bankruptcy — and the pros and cons of each.

Debt management

Debt management plans are ideal for individuals who live with massive amounts of unsecured debt — typically credit card debt. On this type of plan, you will repay your unsecured debt in full, but often at a reduced rate. Instead of making several payments to various creditors each month, you will make one payment to a credit counselor. The counselor will distribute the fees to your creditors per a negotiated agreement.

On the surface, this form of debt relief seems like a win-win situation. You pay less each month, and the creditors receive what they owe. However, to enroll in a plan, you must close all your accounts, which can hurt your score. You typically cannot apply for more credit until your plan is complete. If you miss even a single payment, the counseling agency may boot you from the plan.

Debt settlement

Debt settlement is essentially a financial game of chicken between you and the creditors. When you enroll in a debt settlement program, you stop paying your creditors and, instead, put the money into an account the settlement company holds. As money accumulates in this account (and as you fall further behind on your payments), the settlement company approaches each creditor and lets it know of your situation. The hope is that, eventually, the fear of receiving nothing will motivate the creditor to accept a settlement payment that is far lower than what you owe. The creditor must also agree to not pursue legal action for the remainder.

Not only does this plan rarely work but also, it can cause you more stress than it alleviates. Debt settlement programs do not come with consumer protections, such as automatic stays. While you play your game, creditors can still hound you via phone calls, assess late fees and take legal action. Additionally, if you are successful, the IRS may count the money you saved as income earned. Finally, for every missed payment, your credit score takes a hit.


At the end of the day, if you cannot afford to pay what you owe, bankruptcy is almost always the best option. Chapter 7 can completely eliminate most types of debt, including credit card debt, unsecured loans and medical debt. It also provides numerous consumer protections, including an automatic stay to prevent creditors from further harassing you. Though the bankruptcy itself can stay on your credit report for seven to 10 years, the process is over within months. You can begin to rebuild your credit immediately following the closure of your case.