Credit Counseling vs. Debt Relief vs. Bankruptcy: Which Option Is Right for You? [2025 Guide]
- Credit counseling, debt settlement, and bankruptcy are each a legitimate solution for debt problems.
- To make your decision, consider your financial situation, the expected time to completion, success rate, impact on your credit, cost, and taxes.
- The most important thing is to act on your debt problems. Doing nothing could make the situation worse.
Table of Contents
- Understand Your Debt Solution Options
- Credit Counseling vs. Debt Relief vs. Bankruptcy: Key Differences
- Eligibility for Debt Strategies
- Impact on Your Payments
- Impact on Your Debt
- Impact on Your Credit
- Impact on Your Assets
- Success Rates
- Tax Implications
- Side-by-Side Comparison: Making Your Decision
- Which Debt Solution Is Right for You?
- Real Success Stories: From Debt to Financial Freedom
- Taking Action: Next Steps Based on Your Choice
Getting into debt is easier than leaving it behind, but there are paths out. It’s great that you’re learning about solutions.
You’ve got several debt relief options to get you on your way to a $0 balance so you can say goodbye to creditors and start building your future. These strategies include:
Credit counseling. You work with a professional counselor at a nonprofit agency to create a debt management plan (DMP) to simplify repayment. The credit counselor negotiates terms of your debt, you make a single monthly payment to the counseling agency, and the counselor distributes the funds based on the negotiated terms.
Debt settlement or debt relief. You or a professional working on your behalf negotiates with your creditors to accept less than you owe and forgive the rest.
Bankruptcy. This legal proceeding could restructure your debt or wipe away some eligible debts.
We’ll go through the details of each, to help you understand whether they might fit your situation.
For personalized legal advice, consult with a qualified attorney licensed to practice law in your state.
Understand Your Debt Solution Options
Before you can choose between credit counseling, debt relief, and bankruptcy, learn how all three work.
How credit counseling works
Credit counseling typically involves entering into a debt management plan managed by a credit counseling agency. Accrediting organizations include:
National Foundation for Credit Counseling
National Association of Certified Credit Counselors
Financial Counseling Association of America
Credit counseling agencies are usually nonprofits funded by major credit card companies. The agencies benefit when you repay what you owe.
Your credit counselor may provide a number of services, such as:
Assess your finances
Review your credit report and credit score
Help you set up a realistic budget
Negotiate a debt management plan with your creditors, which could result in lower interest rates and/or waived fees
Collect a single monthly payment from you and distribute it to your creditors based on the terms of your debt management plan
Credit counselors are not the same thing as financial coaches or financial counselors. Beyond an introductory call, credit counseling services are typically reserved for people who agree to enroll in a debt management plan.
Credit counselors don't repair your credit, and they don't negotiate to reduce your total balance. They do work to negotiate lower interest rates, fees, and late payment penalties.
Debt management plans
When you enter a debt management plan (DMP):
Your counselor will negotiate with creditors to lower your interest rates and fees. A lower interest rate could help you make faster progress against your debts. There is no debt forgiveness.
You make one monthly payment to the credit counseling agency managing your DMP. The payment is calculated to fully repay your unsecured debts within three to five years.
Your counselor pays your creditors.
Your credit cards will typically be closed as part of the DMP.
Debt management plans can be a good option if you're in a lot of debt but you have a good income and can afford to pay it off. Many DMPs fail because the payment is unaffordable. A DMP is for someone who needs guidance and accountability.
How debt settlement works
Debt settlement is when your creditor agrees to accept less than the full amount you owe. The rest is forgiven. Creditors may be willing to do this if you have a financial hardship and can’t afford to fully repay your debts.
Debt settlement could significantly reduce your debt, and could help you get rid of your debt faster than by making minimum payments. The downsides include damage to your credit score and the potential for a tax bill.
Here's how debt settlement works.
Save money
You need something to offer your creditors. If you don’t already have cash set aside, you’ll start setting aside an affordable amount of money each month. If you’re working with a debt settlement company, they’ll set up a dedicated account for this purpose.
Many people in financial hardship struggle to save money while keeping up with debt payments, so they stop paying their debts during this time. Others may have already fallen behind on their debts. Either way, when you don’t make your payments, you send a strong signal to your creditor that you’re struggling financially. If you stop paying your debts you should expect significant credit score damage. Also, creditors are likely to step up collection efforts.
Negotiate
You can negotiate debts yourself or work with a professional debt settlement company who negotiates on your behalf. The goal is to get the creditor to agree to lower your debt. Getting this agreement could take several rounds of phone calls. Your creditor might ask for evidence of your financial hardship.
Creditors don’t have to agree to anything less than full payment. But debt lawsuits cost money, and creditors aren’t guaranteed to win. They know that accepting partial repayment might be their most efficient option for recovering at least some of the money you owe.
Some creditors may back off collection efforts if they know you’re actively working toward resolving your debts. Others may go full throttle toward a debt lawsuit.
Satisfy the agreement and put the debt behind you
Once you reach an agreement with your creditor and get it in writing, it’s time to hold up your end of the bargain.
If you’re working with a debt settlement company, they should allow you to review and approve any agreement before acting on it. Also, after you review and approve an agreement and at least one payment is made to your creditor, your debt settlement company has the right to charge its fee. Upfront payments before getting results are against the law.
How long does debt settlement take?
There’s no minimum waiting period before you can try to settle a debt. Let’s say you’re a stay-at-home parent and your spouse passes away, leaving you a $10,000 credit card balance. You’ve got $4,000 in the bank and you’re willing to offer it to settle the debt. You could call and make the offer immediately.
In Freedom Debt Relief’s debt settlement program, most members settle their first debt within a few months. To settle all of your unsecured debts could take three to four years.
What about debt settlement taxes?
Taxes are an important consideration because the IRS considers forgiven debt to be taxable income. To the IRS, getting $6,000 in debt forgiveness is the same as having someone hand you $6,000 in cash.
There’s an exception. If you’re insolvent when you settle the debt, you won’t owe income taxes on the forgiven amount, up to the amount that you’re insolvent. Insolvent means you owe more than you own.
If the surviving spouse in our example above has $25,000 in assets, and $30,000 in debts, she’s insolvent by $5,000. She won’t owe taxes on the first $5,000 in forgiven debt. If she gets $6,000 in debt forgiveness, she might owe income taxes on $1,000.
The IRS publishes an insolvency worksheet to help you figure out where you stand, but tax matters are complex and it’s a good idea to consult a qualified tax professional before you pursue debt settlement.
Bankruptcy options
Bankruptcy is another possible solution when you're deep in debt. The bankruptcy court determines how much you pay your creditors and what form that repayment will take. You'll usually need a lawyer, and you’ll generally pay legal fees.
You can file two different types of bankruptcy, so you'll need to know which you qualify for and which one’s right for you.
Chapter 7 bankruptcy, or liquidation bankruptcy, is means-tested. In other words, do you have the means to repay your debts? If you do, you won’t qualify for Chapter 7. To find out, you’ll take a means test. This test shows either that your household income is below the median in your area or that your discretionary income is too low to repay your debt. You’ll also need to complete credit counseling.
Chapter 13 bankruptcy can be easier to qualify for because it isn't means-tested. You need a regular income and must be able to make some payments on your debt. In Chapter 13, you enter a three- or five-year plan to pay back at least some of what you owe.
Chapter 13 can take much longer than Chapter 7, as you'll take several years to complete your payment plan before any remaining balance is dismissed.
Chapter 7 can usually be completed within four to six months. You might have to turn over some of the things you own to the bankruptcy court. The court sells those things and gives the money to your creditors. Each state and the federal government have different lists of what you’re allowed to keep (those are called bankruptcy exemptions), and what you have to give up. You can choose whichever list benefits you more, but you can’t combine lists.
In some cases, it’s possible to keep a debt and the asset that goes with it. For example, if you don’t want to lose your car, you could sign a reaffirmation agreement. That’s a promise to keep paying the car loan in exchange for being allowed to keep the car.
Here are the timelines for Chapter 7 and Chapter 13 bankruptcy.
| Steps in a Chapter 7 Bankruptcy | Steps in a Chapter 13 Bankruptcy |
|---|---|
| Complete credit counseling within 180 days of bankruptcy filing | Complete credit counseling within 180 days of your bankruptcy petition |
| File your bankruptcy petition | File your bankruptcy petition |
| Meeting of creditors, aka 341 meeting, usually 20 to 40 days after filing | File a repayment plan within 14 days of filing your petition, unless the court grants an extension |
| Sign reaffirmation agreements, usually 80 to 100 days after the meeting of creditors | Begin making payments to the bankruptcy trustee within 30 days of filing, whether or not payment plan is approved |
| Eligible debts are discharged (forgiven). | Meeting of creditors, aka 341 meeting, typically between 21 and 50 days after filing |
| Confirmation hearing to confirm plan is feasible and meets bankruptcy standards. Hearing must take place no later than 45 days after the meeting of creditors | |
| Trustee distributes funds to creditors according to the terms of the plan, which can take three to five years | |
| Remaining eligible debts are discharged (forgiven) upon completion of the plan |
Credit Counseling vs. Debt Relief vs. Bankruptcy: Key Differences
These three debt strategies—credit counseling vs. debt relief vs. bankruptcy—have different characteristics. Here’s what to know about eligibility, the impact on your debt and credit, and the success rates of each option.
Eligibility for Debt Strategies
Credit counseling is open to anyone who is in debt, can afford to repay it, and needs help managing it. Most people get credit counseling if they need help with managing repayment and want to enter into a debt management plan to get some fees reduced or waived
Debt settlement/debt relief is open to anyone who is in debt and can’t afford to fully repay it. To enroll in a professional debt settlement program, you’ll typically need at least $7,500 in unsecured debt.
Bankruptcy is for someone who needs legal protection from creditors. Eligibility rules vary depending on whether you're filing Chapter 7 bankruptcy or Chapter 13 bankruptcy. For Chapter 7, you need to show that you don’t have enough disposal income to pay your creditors. Chapter 13 requires a steady income and limits on your debt: less than $1,580,125 of secured debt and under $526,700 in unsecured debt.
Impact on Your Payments
Credit counseling. Credit counseling does not reduce the amount you owe. Because a debt management plan is designed to clear your debts in three to five years, the monthly payments tend to be high. If you’ve only been making minimum payments on your credit cards, you might get a payment shock. On the bright side, if your credit counselor successfully negotiates your interest rates, you could make more progress with each payment.
Debt settlement/debt relief. Most people stop paying their creditors and instead place the money in a dedicated account. Eventually, you’ll use the funds to make offers to your creditors. The amount you put aside each month is based on your debt amount and what you can afford. You could reach settlements faster if you build up funds faster by contributing more when you can.
Bankruptcy. The impact on payments varies depending on whether you're filing Chapter 7 or Chapter 13 bankruptcy. Under Chapter 7, you’ll stop making payments. Under Chapter 13, you’ll make monthly payments in a three- or five-year plan. The amount is typically equivalent to all of your disposable income. A judge will look at your expenses and decide how much of your income will meet your basic needs. Everything else goes to the court for your creditors.
Impact on Your Debt
Credit counseling doesn't eliminate your debt or reduce the balance. It simply helps you develop a manageable plan to repay it.
Debt settlement could significantly reduce your debt balance. You or a professional debt settlement company negotiate with your creditors to pay less than you owe. Some borrowers get their balances reduced by 50% to 80%. It depends on how much you owe, what your financial situation is, and how willing creditors are to negotiate. Settlements can be for a lump-sum payment or a series of payments. The money comes from the funds you set aside in your dedicated account.
Bankruptcy will have a different impact on your debt depending on the type of bankruptcy you file. Chapter 7 will eliminate your eligible, unsecured debt soon after filing. Chapter 13 requires you to make payments for three to five years. The amount you pay is based on your income, amount of debt, and approved expenses. A judge decides how much you pay. At the end of your payment plan, the remaining balances on eligible debts are forgiven.
Impact on Your Credit
Credit counseling itself doesn’t affect your credit, but it’s usually delivered as part of a debt management plan, which could cause some initial damage. That's because a DMP usually involves closing your credit card accounts while they still have balances. Closed accounts with balances usually have a negative impact on your credit. If you pay your bills on time, avoid new credit card debt, and make progress paying your debt down, your credit scores could recover over time.
Debt settlement will typically hurt your credit score in a couple of ways. First, your credit score will take a hit if you stop making payments to your creditors. Second, your settled accounts will be reported as “settled” on your credit reports. That’s better than collection accounts but not as good as “paid as agreed.” Late payments, collection accounts, and settled notations stay on your credit reports for seven years, but the negative effect lessens over that time.
Bankruptcy: Both Chapter 7 and Chapter 13 are serious and will affect your credit score negatively. You can expect your score to drop by 100 to 200 points or more. Chapter 7 remains on your credit record for 10 years. Chapter 13 remains on your credit report for seven years. In both cases, the negative effect lessens over time.
Impact on Your Assets
Credit counseling won't affect your assets
Debt settlement shouldn't affect your assets
Bankruptcy will impact your assets differently depending on the bankruptcy you file. In Chapter 7, you may have to allow the court to sell off some of your possessions. Things you’re allowed to keep are called bankruptcy exemptions. Some exemptions include your 401(k) balances and the tools you need to do your job. In Chapter 13, you won’t have to sell any assets but their value is a factor when the judge determines your monthly payment.
Success Rates
Credit counseling. Credit counseling agencies don’t publish data about program completion. Some agencies claim up to 70% success. The monthly payment for a debt management plan is often cited as the main reason a person dropped out of the plan.
Debt settlement. More than half of accounts are successfully settled during professional debt settlement. Nearly three-quarters of people are able to settle at least one account. And nearly two-thirds settle at least the amount they owe within three years. There is no data on the success rate for people who settle their own debts outside a formal program.
Bankruptcy. Chapter 7 is usually successful. Chapter 13 has about a 50% completion rate.
Tax Implications
Credit counseling. Debt isn’t forgiven in credit counseling, so there aren’t any tax implications.
Debt settlement tax consequences. Forgiven debt may be taxable.
Bankruptcy. Forgiven debt isn't taxable.
Side-by-Side Comparison: Making Your Decision
Now you know the basics of credit counseling vs. debt relief vs. bankruptcy. This table can help you to understand which strategy might be a good fit for you.
| Eligibility | Credit Impact | Monthly Payment Reduction? | Debt Balance Reduction | Success Rate | |
|---|---|---|---|---|---|
| Credit Counseling | Anyone who wants help | Negative until balances are paid off | Not typically | No | Unknown |
| Debt Settlement | $7,500+ in unsecured debt to enroll in a program | Negative for 7 years | Typically yes | Typically yes | Most people successfully settle at least one debt |
| Bankruptcy | Chapter 7: Unable to afford a payment Chapter 13: Income to pay creditors | Negative for 7-10 years | Chapter 7: No more payments Chapter 13: All of your disposable income | Chapter 7: yes Chapter 13: Possibly | Chapter 7: Close to 100% Chapter 13: About half |
Which Debt Solution Is Right for You?
Now that you understand the basics of credit counseling vs. debt relief vs. bankruptcy, it’s time to decide which might be right for you.
Start with your financial situation. Whether you can afford a payment, and how much, matters. Review the eligibility requirements to see which choices are available to you.
When credit counseling is your best option
Credit counseling could be a good choice if you:
Have income and can afford to repay your debts in full, but you need some help doing it
Want a counselor to create a debt management plan. You’ll probably be able to reduce your fees and simplify monthly bill paying by making just one monthly payment instead of many.
Credit counseling is a less optimal choice if you:
Don't have the money to make payments on your debt
Have decent credit and could qualify for an affordable debt consolidation loan
When debt settlement is your best option
Debt settlement could be a good choice for you if you:
Have $7,500 or more of debt
Have a financial hardship that makes it hard or impossible to fully repay your debts
Are behind on monthly payments and can't catch up
Are willing to prioritize financial stability over your credit standing
Can pay some amount monthly into an account where you’ll build up funds for offering your creditors
Debt settlement may not be the right choice if you:
Have only a small amount of debt that you may be able to pay off
Can afford to repay your debts
Can’t afford to pay anything at all towards your debts
When bankruptcy is your best option
Bankruptcy may be the right choice if you:
Have an overwhelming amount of debt that you can't pay back
Don't have the money to make payments toward debt settlement or your creditors won't agree to debt settlement
Qualify for Chapter 7, don't have many or any assets to lose, and most or all of your debt is unsecured
Need legal protection from your creditors. For example, if your mortgage lender is foreclosing on your home and you want time to get caught up, Chapter 13 could give you the breathing room you need.
Are willing to commit to a three- to five-year repayment plan under Chapter 13
Are willing to prioritize financial stability over your credit standing
Bankruptcy isn't the right choice if you:
Have assets that you don’t want to lose
Don’t want the public record of bankruptcy
Can negotiate an affordable debt settlement agreement with your creditors
Have other ways to pay back your debt that don't create too much of a financial burden
Aren’t eligible for Chapter 7 and don't want to enter a three- to five-year court-supervised repayment plan under Chapter 13
Real Success Stories: From Debt to Financial Freedom
Understanding credit counseling vs. debt relief vs. bankruptcy can help you find a solution that works for you.
Many people who were in debt found their solution with Freedom Debt Relief, often to great success. For example, Chrystina came to Freedom Debt Relief in July 2022 with $25,708 of debt. Chrystina settled 22 debts in just under three years, so she could move on and rebuild a better financial future.
Taking Action: Next Steps Based on Your Choice
If you choose credit counseling
Find an accredited credit counselor
Ask how much their fees are and how long their program takes
Gather your financial information such as recent bills, income statements, and details about your assets for your credit counselor so your counselor can help create a debt management plan
If you choose debt settlement with Freedom Debt Relief
Gather details about your debts
Get a free debt evaluation to find out if you're eligible and to discuss solutions
Begin contributing to your dedicated account
If you choose bankruptcy
Gather information about your assets and debts
Schedule your initial consultation with a bankruptcy attorney
Sign up for your required credit counseling services
Debt relief by the numbers
We looked at a sample of data from Freedom Debt Relief of people seeking credit card debt relief during September 2025. This data reveals the diversity of individuals seeking help and provides insights into some of their key characteristics.
Credit card tradelines and debt relief
Ever wondered how many credit card accounts people have before seeking debt relief?
In September 2025, people seeking debt relief had some interesting trends in their credit card tradelines:
The average number of open tradelines was 14.
The average number of total tradelines was 24.
The average number of credit card tradelines was 7.
The average balance of credit card tradelines was $15,142.
Having many credit card accounts can complicate financial management. Especially when balances are high. If you’re feeling overwhelmed by the number of credit cards and the debt on them, know that you’re not alone. Seeking help can simplify your finances and put you on the path to recovery.
Credit card debt - average debt by selected states.
According to the 2023 Federal Reserve Survey of Consumer Finances (SCF) the average credit card debt for those with a balance was $6,021. The percentage of families with credit card debt was 45%. (Note: It used 2022 data).
Unsurprisingly, the level of credit card debt among those seeking debt relief was much higher. According to September 2025 data, 88% of the debt relief seekers had a credit card balance. The average credit card balance was $16,189.
Here's a quick look at the top five states based on average credit card balance.
| State | Average credit card balance | Average # of open credit card tradelines | Average credit limit | Average Credit Utilization |
|---|---|---|---|---|
| Alaska | $21,224 | 7 | $24,102 | 77% |
| Louisiana | $14,183 | 9 | $28,791 | 77% |
| Oklahoma | $14,132 | 9 | $27,261 | 77% |
| District of Columbia | $18,088 | 8 | $25,731 | 76% |
| Ohio | $15,248 | 8 | $26,156 | 75% |
The statistics are based on all debt relief seekers with a credit card balance over $0.
Are you starting to navigate your finances? Or planning for your retirement? These insights can help you make informed choices. They can help you work toward financial stability and security.
Regain Financial Freedom
Seeking debt relief can be the first step toward financial freedom. Are you struggling with debt? Explore options for debt relief to regain control of your finances. It doesn't matter how old you are or what your FICO score or credit utilization is. Take the first step towards a brighter financial future today.
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Author Information
Written by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.
Reviewed by
Christy Bieber
Christy Bieber has been writing about personal finance and law for 16 years. She has a JD from UCLA School of Law with a focus on business law, and a BA in English, Media & Communications from the University of Rochester, as well as a Certificate of Business Administration.
How does credit counseling affect your credit score compared to debt settlement?
Credit counseling usually involves entering into a debt management plan. This typically results in your credit card accounts being closed. Closing credit accounts before they’re paid off hurts your credit score, at least temporarily.
Debt settlement will damage your credit score if you miss payments while you’re in the process of settling debts. Also, debts noted as “settled” on your credit reports are not as favorable as debts you paid off as agreed. If it helps you to become debt-free, debt settlement could help your score over time when you get your finances under control.
Can I negotiate with creditors myself instead of using debt settlement companies?
Yes, you can negotiate with creditors yourself instead of using debt settlement companies.
A professional debt settlement company may be able to get a better outcome than you could get on your own because they already have relationships with most creditors, as well as experience settling debts.
What debts qualify for credit counseling vs. debt settlement programs?
Debt management plans and debt settlement are for unsecured debts, such as:
Credit cards
Personal loans
Payday loans
Medical bills
Can I include secured debts in credit counseling or debt settlement?
No, secured debt usually can’t be included in a debt settlement or debt management program.
If you can’t repay a secured debt as agreed, the creditor typically takes back the asset used as collateral. For example, if you don’t pay your car loan, the creditor could repossess the car.
Is debt settlement better than Chapter 13 bankruptcy?
With debt settlement, you might be able to get rid of your unsecured debts sooner and for less money out of pocket compared to Chapter 13.
Chapter 13 can temporarily stop collection activities, including foreclosure.
How do I know if I qualify for Chapter 7 bankruptcy?
You must pass the means test by comparing your household income and expenses to the median income where you live. If your income is below the median, you should qualify for Chapter 7.
Will I lose my house in bankruptcy?
Whether you can keep your home in bankruptcy depends on where you live and how much home equity you can exempt from your bankruptcy. Only Texas allows you to keep your home no matter how much it’s worth and how much equity you have.
If you have a paid-off home in a state that only allows a $50,000 home equity exemption, you could be forced to sell it. The first $50,000 would go to you and the rest to your creditors.
How long does each debt solution stay on my credit report?
Debt settlement and Chapter 13 bankruptcy stay on your credit report for seven years, and Chapter 7 bankruptcy stays on your credit report for 10 years.
Can I get new credit cards during credit counseling or debt settlement?
Credit counseling doesn't affect your ability to get new credit cards unless you join a debt management plan. If you open new card accounts, you might not be able to continue with your debt management plan.
Most credit card companies won't give you a new card while you're in the middle of a debt settlement plan.
Even if you can get new credit cards during these processes, you usually shouldn't, as the focus should be on paying off debt.
What happens if I can't afford my debt management plan payments?
If you can't pay your debt management plan payments, you could be taken off the plan. This would make your interest rates and payments go up.
How are debt settlement fees calculated at Freedom Debt Relief?
Fees are based on performance, the total debt enrolled in the program, and the amount of debt successfully settled. Borrowers always have a chance to review the settlement agreement before they approve it.
Is credit counseling or debt settlement better for medical bills?
Credit counseling is generally better if you can afford to fully repay your debts. In a debt management plan, a credit counselor can help you negotiate fees and rates on your medical bill and simplify repayment by allowing you to make one monthly payment to your counselor.
Debt settlement is generally better if you can’t afford to fully repay your debts. Debt settlement could reduce your bills, allowing you to pay less than you owe.
Debt settlement typically causes damage to your credit score but medical bills are treated differently by credit reporting agencies, so the damage may not be as significant. Ask your debt settlement company to explain how settling medical bills could impact your credit.
What's better, a debt consolidation loan or credit counseling?
The answer depends on your goal. A debt consolidation loan is often better than credit counseling if you can qualify for an affordable loan to pay off your existing debt and your goal is to simplify and lower your monthly payments.
Credit counseling is better than debt consolidation if you want more than a new loan to make debt payoff cheaper. If you want help making a comprehensive plan to manage your money, credit counseling could be the better choice.
Can I switch from credit counseling to debt settlement if it's not working?
Yes. If you can’t afford to fully repay your debts, you can start the debt settlement process, either on your own or with the help of a professional debt settlement company.
How do I protect myself from credit counseling or debt settlement scams?
To protect yourself from credit counseling or debt settlement scams, research the company's reputation on sites like the Better Business Bureau. Ask about accreditation or past results, check customer reviews, and make sure the company is up front about its fee structure.
Debt Relief
