Dealing with debt can be frustrating, especially if you’re a homeowner. It can hold you back from creating the home you deserve, and even lead to anxiety that keeps you up at night.
You don’t necessarily need to panic, though. There are actually lots of helpful debt relief options, and even in the most extreme cases — like bankruptcy — it’s often possible to keep your home. We’ll help you learn more about your options when it comes to debt relief vs. bankruptcy. That way, you can move on from your debt and into better things.
How debt relief works
“Debt relief” is a broad term. People often use it to describe many similar-sounding programs, each of which works in very different ways to address debt. Let’s take a look at how each type of debt relief program works.
Debt management plan
Nonprofit credit counseling agencies offer free or low-cost support in navigating debt problems, including options such as debt management plans (DMPs). Look for a reputable agency through the National Foundation for Credit Counseling if you’d like a quality referral.
Agencies typically charge a one-time setup fee of $75, plus monthly fees ranging from $25 to $50, although they offer services on a sliding-fee scale. You can enroll unsecured debts like credit cards into a DMP, and then you’ll make one monthly payment to the counseling agency, which will pay each of your creditors every month. Agencies will also require that you close your credit cards during this process, allowing you to focus on repayment.
In return, the agency will work with your creditors to negotiate lower interest rates and fees. It typically takes three to five years to complete a DMP, and industry estimates show that between 59% and 75% of people are able to pay off all their enrolled debts completely. A DMP can help lower your monthly payments by 10% to 15%, on average, and save you between 20% and 40% over the long run.
Debt settlement
A debt settlement program, on the other hand, works by trying to negotiate with a creditor to accept a lump-sum payoff amount that’s lower than what you actually owe. Sometimes this works, sometimes it doesn’t. Typically, only around half of people enrolled in a debt settlement program end up completing the program.
You can sign up for a debt settlement program with specialized for-profit companies that offer this service. There is no upfront cost, but you will be required to open a savings account with a third-party bank, which typically costs $10 per month. You’ll then be advised to stop making payments on your debt and instead set money aside in this savings account for an eventual settlement. Late charges and interest will continue to accrue on your debt during this time, and about one in 10 people are eventually sued by their creditors for non-payment.
When you have a sufficient amount saved up, the debt settlement company will try to negotiate a payoff settlement with your creditors. If they are successful, you’ll owe the debt settlement company a fee ranging from 15% to 25% of your enrolled debt. You may also owe income taxes on the amount your creditors forgive. If the debt settlement company isn’t successful, you’ll be left to deal with the debt — now much higher — on your own. Either way, you’ll also receive significant credit damage.

Debt consolidation loans
Debt consolidation loans take a very different approach to debt relief. Instead of working with a third-party group to manage your debt for you, you’ll take a more direct role in your repayment plan. You can do this by applying for a debt consolidation loan, which you’ll use to pay off your existing debts.
In order for a debt consolidation loan to work, you’ll need to run some numbers first. A good debt consolidation loan calculator can help you see whether you’d actually save money and get out of debt sooner. In general, the smaller the interest rate and the shorter the term length, the quicker and cheaper it’ll be for you to get out of debt. That might mean making a higher monthly payment, however, so you’ll need to balance your loan options with your ability to pay, too.
Homeowners have a particular advantage here, because you may be able to get much lower interest rates on a debt consolidation loan by leveraging your home equity. Note that “debt consolidation loans” aren’t a formal type of loan; rather, you can use just about anything that offers lump-sum funding without restricting how you spend the funds. Here are some common options:
- Personal loan
- Home equity loan
- Home equity line of credit (HELOC)
- Cash-out mortgage refinance
- Home equity investment
Pros and cons of debt relief
Each type of debt relief has its own pros and cons. If you’re comparing debt relief vs. bankruptcy, though, here are the distinct advantages and disadvantages it offers:
Pros of debt relief
- Consolidation can help you build credit
- No need to go through the court system
- You may be able to save a lot of money over time
- You may be able to get more manageable payment options
Cons of debt relief
- You may need to meet credit and income requirements
- Some options are expensive and take many months or years
- Debt settlement isn’t guaranteed and can cause heavy financial and credit damage
How bankruptcy works
Bankruptcy is a legal process that takes place in a bankruptcy court. You’ll work with court officials, your creditors, and — highly recommended — a bankruptcy lawyer to shed some or all of your debts, depending on your financial situation, the type of debts you have, and your state of residence. If you follow through with the court’s requirements, at the end of the bankruptcy process, your eligible debts will be discharged, freeing you from them for good.
Businesses and individuals can file for bankruptcy. There are several types, but individuals are generally eligible for two types of bankruptcy: Chapter 7 and Chapter 13. Each has different implications.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is also known as a “liquidation bankruptcy,” because all of your assets can be sold and distributed to your creditors to pay your debts. Any remaining debts that qualify are then discharged by the bankruptcy judge overseeing your case. The entire process typically takes four to six months from start to finish. It’ll also stay listed on your credit report for 10 years, although your credit score may start improving in as little as two years.
Having all your assets seized sounds scary, but the reality is that, due to exemptions and cutouts, this doesn’t actually happen for most people. Certain state and federal laws mean that some of your assets are protected and can’t be taken away in bankruptcy, including your house in many cases.
In order to file a Chapter 7 bankruptcy case, you’ll need to meet certain conditions, such as having an income below a certain threshold that varies by state. If you don’t meet the requirements to file Chapter 7 bankruptcy, you’re still generally eligible to file for Chapter 13 bankruptcy.
Chapter 13 bankruptcy
Chapter 13 bankruptcy, on the other hand, is structured more like a consolidation loan. That’s why it’s also known as a “wage earner’s plan.” You’ll make payments for three or five years towards your debts (depending on your income), and at the end, a bankruptcy judge will discharge all of your remaining eligible debts if you’ve followed through with the program.
That’s obviously a much longer and expensive process, with more potential for falling through the cracks, but it still works for many people. A Chapter 13 bankruptcy will also only stay on your credit report for seven years, instead of 10 years.
Pros and cons of bankruptcy
Bankruptcy isn’t something to take lightly, because it can have serious consequences. However, in the right situations, it can lift a huge burden off your shoulders. That’s why it’s especially important to compare the pros and cons of bankruptcy, especially in relation to things like debt consolidation.
Pros of bankruptcy
- No credit requirements
- Quick process (for Chapter 7 filers)
- Stops creditors from contacting you
- No income requirements (for Chapter 13 filers)
- May keep your home and assets in many cases
- Provides some protection from collection efforts like lawsuits and wage garnishments
Cons of bankruptcy
- Significant credit damage
- Court proceedings are public
- Fees and attorney costs can be expensive
- Court processes require jumping through many hoops
- May not work with all types of debts, such as child support, student loans, home debts, and others
Debt relief vs. bankruptcy: How to choose
When you’re struggling with debt, it might seem like bankruptcy is the only option. However, this may not always be true — but, then again, sometimes it is. How can you know? It’s always best to chat with a financial advisor or counselor if you can, but in general, here are some signs that can help you choose between debt relief vs. bankruptcy:
When debt relief makes sense
- You want to maintain your good credit score.
- You know you’ll be able to follow through with a debt relief plan.
- You’re able to repay your debt within a reasonable amount of time.
When bankruptcy makes sense
- Your debts are eligible for discharge in bankruptcy.
- You want to stop overwhelming debt collection efforts.
- You’ve tried other debt relief options, and they haven’t worked.
- You have too much debt to repay within a reasonable amount of time.
- You’re not as concerned about your credit score or the negative stigma of bankruptcy.
Frequently asked questions
Is it better to file bankruptcy or do debt relief?
If you’re choosing between debt relief vs. bankruptcy, one isn’t inherently better than the other. Debt relief might work better if you can afford to pay off your debt within a reasonable period of time. If not, then bankruptcy might be a better option.
Can I still use my credit card after debt consolidation?
Yes. A debt consolidation loan doesn’t require you to close down your credit card like other forms of debt relief, such as a debt management plan. Be careful not to rack up a balance on your credit card again, though, or you’ll be back where you started.
How can I get all my debt into one payment?
A debt consolidation loan lets you combine all of your eligible debts into a single payment by taking out a new debt to pay off your old ones. You can use personal loans, home equity loans, or home equity investments to do this.

Final thoughts
Whether you're struggling with high medical bills, unpaid tax debt, or large credit card balances, dealing with debt can be exhausting. You’re definitely not alone in dealing with this problem, though, and that means there are lots of options for most people to choose from. A good financial advisor, credit counselor, or even bankruptcy attorney can help you sort through your options and provide the best advice about which path is appropriate for you.
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