Debt Relief vs. Bankruptcy: Pros, Cons, and How to Choose the Right Path

When you’re overwhelmed by medical bills, credit cards, or personal loans, bankruptcy may seem like the only way out, but it’s not your only option. Debt relief programs, including settlement and consolidation, offer alternatives that could help you avoid court and protect your assets.

If…	Consider…
You want to make monthly installment payments to pay off creditors	Chapter 13 bankruptcy
You want to take a chance to settle your debts for lower amounts	Debt relief
You don’t have many assets that would be liquidated and want your debt discharged	Chapter 7 bankruptcy
You don’t want to be harassed by creditors	Bankruptcy
You’re seeking to consolidate or simplify your financial life	Debt consolidation (through a debt relief company or a loan)
You’re at risk of losing assets that you don’t want to give up	Chapter 13 bankruptcy
You’re struggling to make monthly payments on debt	Debt relief
You have a high DTI	Debt relief
Your debt is causing you serious stress	Debt relief

While both approaches can reduce or eliminate debt, they come with different costs, timelines, and credit impacts. In this guide, we’ll explain how debt relief and bankruptcy compare, who each option is best for, and what to expect if you pursue either route—so you can make the smartest choice for your financial future.

Table of Contents

1. Debt relief vs. bankruptcy
2. What is debt relief? 
3. What is bankruptcy? 
4. Which should you choose? 
5. If you’re considering bankruptcy
6. If you’re considering debt relief

Debt relief vs. bankruptcy

Debt relief	Chapter 7 bankruptcy	Chapter 13 bankruptcy
Company attempts to negotiate with your creditors to settle balances for less	Liquidate (sell) nonexempt assets and use the proceeds to repay creditors; remaining unsecured debts after liquidation and repayment may be discharged	Reorganize debts via a court-approved repayment plan based on income and expenses
Must pay settlement fees (typically 15% to 25% of your enrolled debt), plus interest and fees on debt consolidation if you choose to consolidate	$335 court fees; Attorney fees ($1,500 – $5,000); Up to $50 for credit counseling	$310 court fees; Attorney fees ($1,500 – $5,000); Up to $50 for credit counseling
Typically last 24 – 48 months	Lasts 4 – 6 months	Lasts 3 – 5 years
Past-due accounts stay on your credit report for up to seven years	Stays on credit report for up to 10 years; Credit score may drop by around 200 points	Stays on credit report for up to or seven years; Credit score may drop by around 200 points
No loss of assets	You could lose assets, depending on state law	You typically won’t lose assets

What is debt relief? 

Debt relief is a process that helps individuals or businesses reduce or manage their debts, often through negotiation, consolidation, or structured repayment programs. It’s designed to ease financial pressure and make repayment more manageable. 

However, debt relief can come with trade-offs, such as fees, potential credit score impacts, and tax implications for forgiven debt, making it important to weigh the benefits against the drawbacks before committing.

Types of debt relief 

Debt relief companies usually offer a couple of types of debt relief. Here’s how those debt relief options and programs work—and what to expect from companies that provide them.

1. Debt settlement

This method of debt relief isn’t a loan. An agent with a debt relief company will negotiate with your creditors to try to settle each debt for a lower amount. However, even the most reputable debt relief companies can’t guarantee that they’ll reach a settlement with your creditors.

To build funds in an escrow account, used to make settlement offers, these companies typically require monthly deposits. At the same time, you’ll stop making payments to your creditors, which will result in past-due accounts and a drop in your credit score. Once a settlement is approved, you’ll pay a settlement fee to the company.

National Debt Relief, our team’s choice for the best company in this space, typically charges 15% to 25% of your enrolled debt and works to resolve debts in 24 to 48 months.

While debt settlement may reduce what you owe, the process comes with credit risks, fees, and no guarantees of success.

2. Debt consolidation

When you apply to find your options with a debt relief company, many also check your eligibility for debt consolidation services with partner lenders. This means you’ll combine your unsecured debts into one balance that you’ll pay off, often with a streamlined monthly payment.

Some companies that focus primarily on settlement, such as Accredited Debt Relief, may refer you to a partner lender for a consolidation loan if it looks like a better fit. These loans typically require stronger credit, but they can help you pay down debt more efficiently, and without damaging your credit the way settlement can.

If the company offers this option, its representatives can help you determine whether consolidation makes more sense than settlement and how to proceed.

What is bankruptcy? 

Bankruptcy is a legal process that helps individuals overwhelmed by debt find relief through court-approved solutions. It can eliminate certain debts or establish a repayment plan, providing protection from most collection efforts. 

While bankruptcy offers a fresh start, it has significant downsides, including long-term credit impacts and potential asset loss. It’s essential to understand these considerations before pursuing this option.

Types of bankruptcy 

The two most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. 

1. Chapter 13 bankruptcy allows you to keep all property and assets and create a repayment plan to pay off your creditors with installment payments over a period of three to five years. 
2. Chapter 7 bankruptcy has no repayment plan like Chapter 13. Instead, an impartial trustee is appointed to sell (liquidate) your nonexempt assets and use the funds to pay your creditors. Exemptions to protect certain property exist and vary, depending on federal and state laws. 

We recommend consulting with an experienced bankruptcy attorney familiar with your state laws. With Chapter 7 bankruptcy, eligible debts can be discharged in four to six months, offering a fresh start to rebuild your credit and finances.

Debt relief vs. bankruptcy: Which should you choose? 

It’s important to choose the best option for your financial situation. Many bankruptcy attorneys offer a free consultation to gather information about your finances and creditors and come up with the best option for your situation. You may not be allowed to file Chapter 7 or Chapter 13 in some situations.

Consider contacting debt relief companies to find out what kind of debt relief program you qualify for and its requirements. Ask the debt settlement agent about the percentage for settlement fees and the monthly payment amount, how long you can expect to be in the program, and what percentage of customers’ debts have been settled for a lower amount.

Neither of these options is ideal because your credit will take a hit for up to seven years with debt relief or Chapter 13 and up to 10 years if you file Chapter 7. However, if you’re falling behind on payments or struggling with overwhelming debt, both options could get you out of debt.

If you’re considering bankruptcy or debt consolidation, ask yourself whether you have any other choices.

Bankruptcy and debt relief options are typically the last option. Debt is a black hole for building wealth, especially at high interest rates and when bearing down upon one’s credit score.

Debt must be addressed immediately in this situation. Balance losing assets or having long-term financial consequences against the current cost of debt. It is much easier to build up assets again with a strong cash flow than to have assets with most of your cash flow going to debt.

Kyle Ryan, CFP®

What to do if you’re considering bankruptcy

If you’re considering bankruptcy, consult a reputable bankruptcy attorney to assess your financial situation and determine whether bankruptcy is the right option for you. They can help you understand which type of bankruptcy fits your needs and guide you through the filing process. 

Look for free resources, such as credit counseling agencies approved by the U.S. Department of Justice, to explore alternatives and meet pre-filing requirements. Taking these steps ensures you make an informed decision while minimizing risks and maximizing potential benefits.

What to do if you’re considering debt relief

If you’re considering debt relief, begin by researching reputable companies with a proven track record. National Debt Relief is the highest-rated option in our stringent editorial ratings. 

To avoid scams, it’s crucial to choose a company that is well-reviewed and transparent about fees and outcomes. To get started, assess your financial situation, set realistic goals, and consult our best debt relief page for trusted options to regain financial stability.