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Published: Apr 04, 2025 9 min read
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Several recent signs are highlighting the fact that consumers are struggling to keep up with their debt payments. Bankruptcy filings jumped last year, delinquency rates remain elevated and Americans are feeling pessimistic about almost all aspects of their finances.

Significant debt and an inability to keep up with your monthly bills can make it feel like you’ll never regain control of your finances. If you’re in that position, debt relief and bankruptcy are two options that could offer a path out of debt. Here’s what to know before you pursue either.

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Debt relief could help you settle your debt for less than you owe

Debt relief is generally a less drastic measure than bankruptcy for those with significant debt. The process, also called debt settlement or debt resolution, involves negotiating with your creditors to try and reduce what you owe. You can do this on your own, but many people choose to work with debt relief companies, as it feels less intimidating than handling it solo.

Whether you work independently or sign up with a debt relief company, there are no guarantees your creditors will be willing to settle. According to an American Association for Debt Resolution (AADR) study, participating debt relief companies successfully negotiated settlements on around 55% of accounts. If a company is successful, you’ll pay a fee between 15% to 25% of the enrolled debt. (Note that it’s illegal for a company to charge fees before they’ve secured a settlement.)

People seeking credit card debt relief typically owe several thousand dollars to multiple creditors, and they may be struggling with poor credit due to missed or late payments. If you go the debt relief route and haven’t already fallen behind on payments, you’ll likely need to stop making monthly payments entirely. The idea is that stopping your payments will give you leverage during settlement negotiations, though missed payments can (and likely will) harm your credit.

For some borrowers, the credit risk is less of a concern than their unmanageable debt. Plus, the benefit to the consumer who’s successful in debt relief programs has been independently verified, says Steve Boms, president of Allon Advocacy and legislative director for the AADR. The typical client gets their first settlement within a few weeks to a couple months.

“They can begin to see the light at the end of the tunnel,” he says. Ultimately, customers see a net savings of more than 30 cents on the dollar.

If you do choose to go the debt relief route, keep in mind that the first settlement may happen quickly, but the entire process of negotiating with all your creditors can take anywhere from two to four years. Finally, working with a debt relief company does require that you have some money coming in, as you’ll have to build up funds to offer the creditors as a settlement.

Bankruptcy could help discharge your debt through the courts

Bankruptcy is a public, legal process that’s typically designed for people at the end of their rope financially. Filing for bankruptcy could help you discharge most of your debt or work out a payment plan through the court system. People considering bankruptcy often have significant debt and have already pursued other, less drastic measures to alleviate their burden.

Chapter 7 and Chapter 13 are the two most common bankruptcy filings, and both can significantly hurt your credit. That said, bankruptcy can protect you from being sued by creditors, a legal protection not afforded by debt settlement. Here’s how each works.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is generally the quickest way to get a clean slate. With this type of bankruptcy, all or most of your unsecured debts can be discharged in as little as four months and the success rate is high: Almost everyone who files sees a discharge, according to Upsolve, a nonprofit that helps people file for Chapter 7 bankruptcy for free. The catch is that not everyone is eligible to file. To qualify, you’ll need to pass a means test, which looks at your income relative to your debt. Your income needs to be below a certain threshold, and relatively low compared to your debt burden.

Typically, if you qualify for Chapter 7 bankruptcy, the court requires you sell off assets and use those funds to repay unsecured debts. Then your remaining debts will be forgiven. Even if you don’t have assets to sell, such as a car, or your home if it’s not protected by your state’s homestead exemption, your debts can still be discharged through a Chapter 7 filing.

A Chapter 7 bankruptcy stays on your credit report for up to 10 years, making it significantly harder to qualify for future financing. Thus, it’s generally only a good option if you’re in dire financial circumstances. Filing fees can amount to a few hundred dollars, plus attorney fees, which often cost thousands.

Chapter 13 bankruptcy

A Chapter 13 bankruptcy is more complicated and drawn out, but if your income is too high relative to your debt, it may be an alternative to Chapter 7. When you file for Chapter 13, the courts work with you to reorganize your unsecured debts and formulate a repayment plan. A Chapter 13 bankruptcy requires consistent monthly payments for three to five years, which could be difficult to afford if you’re already on shaky financial ground or don’t have steady income. About half of Chapter 13 cases that were closed in 2023 ended in success, with the consumer getting a discharge after completing their payment plan, according to federal court data.

Because you’re making monthly payments with a Chapter 13 bankruptcy, the impact to your credit can be less severe than with Chapter 7. That said, it’ll still remain on your credit report for up to seven years. During that time, it could be much more difficult to get approved for new loans or credit lines. As with Chapter 7, filing fees are typically a few hundred dollars. You’ll also pay attorney fees, which can be more expensive than the fees for Chapter 7 and will vary based on your location and case complexity.

Debt relief vs. bankruptcy: Which is better?

Whether you should consider debt relief or bankruptcy depends on your financial circumstances and goals. In some cases, another route altogether may be better. If you still have a sufficient amount of money coming in each month to pay your debts, debt consolidation or budgeting to pay down your debt may serve you better, Boms says.

But if you’re weighing your options between debt relief vs. bankruptcy, here’s a brief overview of when each debt solution makes more sense.

When debt relief is better

Debt relief is generally a better choice if:

  • You have significant unsecured debt and can’t qualify for debt consolidation.
  • You’re behind on payments, though not significantly.
  • You still have steady income to build up money for settlements.
  • You want to avoid bankruptcy.
  • You understand the tax and credit ramifications.

When bankruptcy is better

Bankruptcy is generally a better choice if:

  • You have significant debt and have exhausted your other repayment options.
  • You can qualify for Chapter 7 bankruptcy.
  • Your credit has already declined due to missed and late payments.
  • You’re concerned about legal action from creditors.
  • You can afford the upfront fees for filing and hiring an attorney.
  • You understand the impact to your credit.
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