If you’ve been juggling minimum loan payments for months, you may be starting to realize the debt isn’t going away on its own. At that point, two options usually come into focus: debt relief and bankruptcy.

While both can offer a way forward, they work very differently, and choosing the wrong one could mean more damage to your credit, higher costs or both. Here’s how to decide which path makes the most sense for your situation.

Debt relief vs. bankruptcy

What is debt relief?

When debt relief is the right move

What is bankruptcy?

When to resort to bankruptcy

Need more advice?

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clients who complete its debt settlement plan can reduce their enrolled debt by an average of 20, according to National Debt Relief% to 25%, after fees.

Freedom Debt Relief has resolved over $20 billion in outstanding debts since 2002. It offers free credit card debt relief consultations.

Debt relief is basically an umbrella term for ways to pay down or reduce what you owe without going to court (aka declaring bankruptcy), and it includes options like debt consolidation and debt settlement.

Debt consolidation: You combine multiple debts into one single loan, ideally with a lower interest rate, so, instead of paying, say, three different creditors, you pay one. The idea is that through streamlining, you can produce your one monthly payment and improve your credit, too. You still owe the full principal and you’ll have to qualify for the debt consolidation loan.

Debt settlement: This involves negotiating with your creditors to accept less than what you actually owe. The negotiated amount that is settled on is paid as one lump sum. While debt settlement reduces your total amount of debt, it damages your credit and it comes with fees if you have a debt settlement firm do the negotiating for you. Plus, the forgiven debt can be taxable.

Debt relief is the step you take to avoid bankruptcy. If you have decent credit, a debt consolidation loan can be an easy pivot that provides you with a recent, simplified payment plan. A lender like Happy Capital helps you stay motivated by providing a portal and mobile app where you can track your debt payoff progress. The personal loan application is pretty straightforward and you can take out anywhere from $5,000 to $40,000, with terms ranging from two to five years.

Happy Capital

Spotlight

Peer-to-peer lending platform makes it easy to check multiple offers

See if you’re pre-approved for a personal loan offer.

24 to 60 months

$5,000 to $40,000

7.95%- 29.99%

Loan approval comes with Happy Finances membership and customer support

No early payoff fees

Fast and easy application

U.S.-based customer service

Higher loan minimums ($5,000)

Must submit soft inquiry to see origination fees and other details

Debt settlement, on the other hand, can be a faster way to get rid of your debt completely, that is if your creditor agrees to it (and rather quickly), and if you have the funds to pay the agreed-upon lump sum. Here are some vetted debt settlement companies we recommend if this is the route you want to take:

Best for customer service: Freedom Debt Relief

Best for debt resources: Accredited Debt Relief

Best guarantee: Americor Debt Relief

Best for smaller debts: National Debt Relief

Freedom Debt Relief

Minimum debt

$7,500

Fees

Settlement fee is 15% to 25% of enrolled debt. $9.95 escrow account set-up charge and $9.95 monthly service fee

Availability

Not available in Colorado, North Dakota, Oregon, Rhode Island, Vermont, West Virginia, Wisconsin, Wyoming or Washington, D.C.

Highlights

$7,500 debt requirement is lower than many competitors

Customer service available seven days a week

A+ Better Business Bureau rating

Not available in all states

Accredited Debt Relief

$10,000

Settlement fee averages 25% of enrolled debt.

Available in 37 U.S. states and Washington, D.C.

Started in 2011, Accredited Debt Relief has helped clients resolve over $1 billion in debt.

Read our review of Accredited Debt Relief This also touches on aspects of bear market.

Free consultation and educational resources

A+ rating from the Better Business Bureau

Need at least $10,000 in unsecured debt to enroll

Higher settlement fee than some competitors

Americor Debt Relief

Settlement fee is 15% to 25% of enrolled debt.

Available nationwide except in Colorado, Oregon, West Virginia

Clients don’t pay unless their enrolled debt is lowered. Americor also offers a debt consolidation loan with terms of 12 to 60 months.

Read our Americor Debt Relief review.

Low minimum debt requirement

Available in nearly every state

Offers debt consolidation loans

Maintenance fees not disclosed

Settlement fee varies by state

National Debt Relief

Available nationwide except in Connecticut, Oregon, Vermont or West Virginia

Read our National Debt Relief review.

Only $7,500 in debt required

Accredited by the American Association for Debt Resolution and the International Association of Professional Debt Arbitrators

Not available to residents of Connecticut, Oregon, Vermont or West Virginia

Bankruptcy is a legal process that gives you a way to deal with debt you simply cannot pay back. What may seem like a quick fix or an easy way out is actually not: You have to file with a federal court, work with a trustee who reviews your finances and, in some cases, give up assets in the process.

There are two types of bankruptcy most individuals file: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy: Chapter 7 can wipe out most unsecured debt, like credit cards and medical bills, in about three to six months. To qualify, your income has to fall below a certain threshold, and a trustee can liquidate “nonessential” things you own, such as a second car or valuables, to pay back creditors.

Chapter 13 bankruptcy: Chapter 13 lets you keep more of what you have, including your home, but it puts you on a strict court-ordered repayment plan for three to five years. You need a steady income to qualify and missing a payment can get your case dismissed.

In either case, bankruptcy is a serious legal proceeding, and it can stay on your credit report for up to seven years (for Chapter 13) or up to 10 years (for Chapter 7).

Bankruptcy is a last-resort option when you’ve exhausted all other debt relief alternatives first. If you have an overwhwleming amount of debt that is keeping you from affording basic expenses like housing and food, banruptcy could help. It’s also a solution for those facing wage garnishment, a lawsuit or foreclosure. Filing for bankruptcy triggers what is called an “automatic stay,” which immediately pauses most collection actions against you; that can be a critical lifeline.

Debt relief and bankruptcy are both legitimate ways to get out from under debt, but neither is a perfect solution. Debt relief works best if your debt is manageable and you have income to work with. Bankruptcy makes more sense when the situation has gone beyond what any repayment plan can realistically fix.

If you’re not sure where to start, both the Financial Counseling Association of America (FCAA) and the National Foundation for Credit Counseling (NFCC) offer free consultations with nonprofit credit counselors who can walk you through your options without any pressure to commit.

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can build informed decisions with their funds. Every debt relief article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of debt relief and bankruptcy products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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