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8 Alternatives to Debt Settlement for Debt Management and Relief

When you’re behind on all your bills and fending off daily calls from debt collectors, debt settlement starts to look like a pretty tempting prospect. If your creditors would agree to cancel your debts in exchange for one lump-sum payment, you think, all your troubles would be over.

But settling your debts can bring major problems of its own. Debt settlement is a long and arduous process. It causes serious damage to your credit score. It can leave you with a big bill for taxes on the canceled debt. And if you hire a debt settlement agency rather than negotiating with lenders yourself, it comes with high fees — up to 25% of your total debt.

In short, debt settlement is far from a magic cure for credit woes. Before you jump into this long and painful process, it’s worth considering other alternatives that could be faster, easier, or less harmful to your credit.

Alternatives to Debt Settlement

Debt settlement certainly isn’t the only way to get out from under the burden of overwhelming debt. In some cases, you can pay off debt on your own with careful planning. You can also try to negotiate a payment plan with your creditors. 

A debt consolidation loan or balance transfer credit card can help make debt more manageable. If that isn’t enough, there are other debt relief options to consider, such as a debt management plan or loan forgiveness. And as a last resort, bankruptcy is always an option.

1. Make Your Own Payment Plan

When dealing with debt, your first, best option is to find a way to pay it in full. While many debt relief options hurt your credit, paying off debt improves it. And boosting your credit score helps you get favorable rates in future, so you’re less likely to get in over your head again.

There are many strategies for paying off debt. Sometimes, better budgeting can help you squeeze out enough money to make your monthly payments. Even if you only make minimum payments, it will keep you from falling further behind until your personal finances improve.

You can also turn to various sources of emergency cash. You can seek financial assistance to keep up with bills, borrow from family and friends, or raise cash through crowdfunding. If you just need a small sum, a pawn shop loan or paycheck advance can help you make ends meet.

2. Talk to Your Creditors

If you can’t figure out a way to keep up with all your debts on your own, try leveling with your creditors about your situation. Explain why you’re having trouble making payments and ask if they can help you out.

Most credit card companies have hardship programs for borrowers in financial difficulties. They can offer lower interest rates and waive fees to help you keep up with payments. Other types of lenders can offer repayment plans with smaller monthly payments over a longer period.

It’s in your creditors’ interest to make it easier for you to pay your debt. If you fall so far behind that you decide to declare bankruptcy, they could end up with nothing. Often, they’re willing to negotiate rather than take that risk.

3. Credit Counseling

If you have trouble working out your own debt payment plan, perhaps credit counseling can help. Credit counseling agencies are either for-profit or nonprofit companies that help individuals deal with debt for a fee.

A credit counselor can look over your financial situation and offer suggestions for handling it. For instance, they can help you draw up a new budget or make suggestions about which debt to focus on first. They can also let you know if you qualify for programs like student loan forbearance. And some counselors can call up your creditors and negotiate on your behalf.

If this isn’t enough, credit counselors can educate you about other debt relief options. They can help you choose between debt consolidation, debt settlement, a debt management plan, or bankruptcy. And they can help you with the paperwork for whichever option you choose.

4. Debt Management Plan

One of the main services credit counseling agencies offer is helping you set up a debt management plan (DMP). A DMP is a binding agreement to pay off your total debt within a specific period, typically three to five years. 

With a DMP, you make a single monthly payment to your credit counselor. The service then divides up the payment among your creditors. In addition, you pay an initial fee to the credit counselor to set up the DMP and a monthly fee to maintain it.

DMPs only work for unsecured debts, such as credit card debt and medical bills. You can’t use them to pay off mortgages, car loans, or federal student loans. A DMP doesn’t reduce the amount of debt you pay, but it can reduce the interest or fees you pay on it.

A DMP doesn’t directly harm your credit score the way debt settlement does. However, setting one up usually involves closing all your old credit card accounts. This hurts your score indirectly by reducing your available credit.

5. Debt Consolidation Loan

If you have several high-interest debts, a debt consolidation loan can help bring your monthly payments down to a manageable level. It works by rolling several existing debts into a single loan with a lower interest rate.

A debt consolidation loan doesn’t reduce the total amount you owe, but it can reduce the amount you pay each month. It also doesn’t have a negative effect on your credit like a debt settlement.

You can use a debt consolidation loan to pay off any kind of unsecured debt. This includes credit card debt, personal loans, medical debt, unsecured personal loans, and sometimes student loans. You can’t use it for secured debts such as a mortgage or car loan. 

Most debt consolidation loans are long-term, fixed rate loans. You can also use other types of loans to pay off existing debt, such as a home equity loan, a home equity line of credit, a 401(k) loan, or borrowing against your whole life insurance policy. But these options are less desirable because they put your assets at risk.

6. 0% Balance Transfer Cards

If you’re struggling with credit card debt, transferring the balance to a card with a lower interest rate can help. A balance transfer can’t reduce your debt, but it can make the interest on it more manageable.

The best card for this purpose, if you can get it, is a 0% balance transfer credit card. However, these cards are hard to get if you don’t have good credit. And they have other downsides, including:

  • Limited Transfer Amounts. The bank generally limits the amount of money you can transfer to a new 0% card. That means you can’t count on using them to consolidate all your existing debt.
  • Limited Introductory Periods. The 0% rate on these cards is only an introductory rate. Typically, it expires within 21 months, if not sooner. After that, you must start paying interest — often at a high rate — on any balance you still owe.
  • Balance Transfer Fees. When you transfer a balance to a 0% card, you generally pay a balance transfer fee of 3% to 5%. In some cases, this fee can amount to more than the interest you save by moving the balance.

7. Debt Forgiveness

Debt settlement isn’t the only way to have some or all of your debt canceled. Depending on what kind of debt you have, you may be able to take advantage of programs like:

  • Student Loan Forgiveness. Federal student loan forgiveness programs offer a way out of high student loan debt. However, most borrowers don’t qualify for these programs. Some programs depend on your income, while others depend on your profession.
  • PPP Loan Forgiveness. If you took out a Paycheck Protection Program (PPP) loan to keep your business running during the COVID-19 pandemic, you may qualify for PPP loan forgiveness. Visit the Small Business Administration website to see if you’re eligible.
  • Tax Debt Forgiveness. If you owe federal back taxes, you can attempt to make an offer in compromise on this debt. Like a debt settlement, this is a lump sum payment of an amount smaller than your total debt. But the IRS typically approves these requests only for people who are really broke, with next to no assets.

Currently, there are no loan forgiveness programs for mortgages. However, there are federal programs to help you refinance your mortgage to make it more affordable. These include the Freddie Mac Enhanced Relief Refinance and the Fannie Mae High LTV Refinance Option.

8. Bankruptcy

If your financial situation is dire, declaring bankruptcy might be your best option. It’s a faster process than debt settlement and can erase more of your debt. It’s also less hassle, as it doesn’t require you to negotiate with creditors or come up with cash for a lump-sum payment. And once you’ve filed for bankruptcy, debt collectors have to stop pestering you.

However, bankruptcy is also just about the worst thing that can happen to your credit score. It creates a black mark that stays on your credit report for up to 10 years as opposed to seven years for debt settlement. During this time, you may find it difficult to secure new credit and won’t qualify for the most favorable rates and terms.

There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. They’re known as liquidation and reorganization, respectively.

In a Chapter 7 bankruptcy, you must sell off your personal property to pay off debt. That can include real estate, jewelry, and works of art. However, you usually get to keep some of your home equity, your main car, and tools you use for work.

A Chapter 13 bankruptcy works more like a debt management plan. It allows you to keep your assets in exchange for paying off all or part of your debt over three to five years. This is slower than Chapter 7, but it only stays on your credit report for seven years.

Final Word

For some borrowers, debt settlement really is the best option. It can work well if you have only unsecured debt and are already several months behind on payments, but you also have — or can raise — the cash for a lump-sum payment. It also helps to have good negotiating skills.

But not that many borrowers are in this exact situation. If you’re not, start by taking a hard look at your own finances. Consider tough options like slashing monthly expenses, including big ones like rent, or seeking help from aid programs.

If you can’t see your way to a solution on your own, your next best option is to see a credit counselor. They can help you evaluate your budget to find savings you might not have considered. And if that doesn’t work, they can help you figure out which debt relief option is the best choice in your situation.

Amy Livingston is a freelance writer who can actually answer yes to the question, "And from that you make a living?" She has written about personal finance and shopping strategies for a variety of publications, including,, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.