Credit counseling vs. bankruptcy vs. debt relief: Which path is right for you?

CBS News

12-03-2025

If you're facing issues with unpaid debt, it can feel like you're walking around with a heavy weight on your shoulders — one that puts extra pressure on nearly every aspect of your life. Millions of people are dealing with that issue right now, though, thanks to today's high-rate environment. Not only are credit card rates sitting at a record high on average, but other borrowing rates are higher than they were just a few years ago, too. As a result, delinquency rates are growing and so is the total amount of credit card debt nationwide.
The good news, however, is that there are solutions to consider if you're dealing with this type of issue. In fact, there are a few different options — credit counseling, bankruptcy and debt relief — that could make sense in this situation. Choosing the right one isn't always straightforward, though. Each path toward debt relief has its benefits and downsides, after all.
"The decision on which solution to use depends on each individual's financial situation and preferences, too," says Jason Pack, chief revenue officer for Freedom Debt Relief. "There are multiple ways to consolidate your debt." So, how can you determine which option is the right option for you? It starts by understanding the key differences between these approaches.
Speak to a debt relief expert about your options today.
Credit counseling: Best for financial education and moderate debt relief
Credit counseling is generally the most education-focused approach to debt management, combining financial guidance with practical solutions for debt repayment. This option is particularly useful for those with a steady income who are struggling with debt management but want to avoid major damage to their credit score.
Working with a credit counseling agency typically begins with a review of your financial situation, including your income, expenses and debts. The goal is to develop a debt management plan, one that could include securing lower interest rates and consolidating multiple payments into a single monthly payment.
Note, though, that credit counseling also requires commitment and patience, but it won't eliminate or reduce debt the same way that debt relief or bankruptcy can. These programs typically take three to five years to complete, and you'll need reliable income to make consistent payments.
Find out how to get rid of your high-rate debt.
Bankruptcy: Best for severe debt crises and legal protection
Bankruptcy is the most powerful legal tool available for those struggling with insurmountable debt. It comes in two primary forms: Chapter 7, which can eliminate most unsecured debts within months, and Chapter 13, which creates a structured repayment plan that lasts from three to five years. This option is generally most appropriate for those facing aggressive collection actions, wage garnishment or debts that far exceed their ability to pay.
The process begins with a thorough evaluation of your financial situation to determine which type of bankruptcy best suits your circumstances. Chapter 7 typically works best for those with limited income and primarily unsecured debts, while Chapter 13 suits individuals with regular income who need time to catch up on secured debts like mortgages.
The tradeoffs are substantial, however. Bankruptcy remains on your credit report for up to 10 years, affecting your ability to obtain credit, rent housing or even secure certain jobs. Not all debts can be discharged through bankruptcy, either.
Debt relief: Best for significant debt reduction without bankruptcy
Debt relief offers a middle ground between credit counseling and bankruptcy. This approach generally involves working with a debt relief company to settle your debt for less than what's owed by negotiating with your creditors. It's typically most suitable for those with significant unsecured debt who want to avoid bankruptcy but need more relief than credit counseling can provide.
To prepare for negotiations with creditors, consumers in a debt settlement program can choose to stop payments on accounts. Letting the debts go past due can demonstrate to creditors that they are experiencing a true financial hardship. As a result, creditors are usually more willing to negotiate balances due.
During this period, the consumer makes monthly deposits into a dedicated savings account instead of making payments to creditors. When a sufficient balance has been built up, the debt settlement firm can start negotiating with the creditors. This usually involves offering reduced payments, either as a lump sum or a series of payments scheduled over an agreed-upon period, in exchange for resolving the debt.
The process is generally very effective, says Pack. Negotiations can often lead to a reduction in debt owed of 30% to 50%, and sometimes more. At Freedom Debt Relief, the first settlement often takes place within a few months of beginning a debt settlement program, he says.
"Clients see progress, results and a light at the end of the tunnel. The relief they experience is significant and serves as a great motivation for them to continue the program, which can take a few years to complete," Pack says.
There are downsides, though. You could see your credit score decline as accounts become delinquent during the process, and there's no guarantee that creditors will settle, either. There are fees and potential tax repercussions to consider, too, but if you're facing an overwhelming amount of debt, this option may help you get out of debt while paying a lot less than you currently owe.
"For as much help as it can provide some consumers, debt settlement also has its downsides. During the period in which accounts become delinquent, credit scores will go down. And there are never any absolute guarantees that every creditor will settle accounts. There are also fees and some potential tax consequences. Still, for someone dealing with a serious debt hardship, debt settlement can be a viable option to help them get out of debt and rebuild their financial lives," Pack says.
Which path is right for you?
The choice between credit counseling, bankruptcy and debt relief depends heavily on your financial situation. If you're unsure which one would work best, it may help to ask yourself the following questions:
Can I still afford to make monthly payments? If yes, credit counseling might be the best route.
Am I drowning in debt with no way to pay it off? Bankruptcy could provide the fresh start you need.
Would I rather negotiate my debts down and take a short-term credit hit? If so, debt relief might be the right option.
It's also a good idea to speak with a debt expert before making any final decisions. They can help you assess your situation and determine the best path forward.
The bottom line
Debt doesn't have to control your life. Whether you choose credit counseling, bankruptcy or debt relief, there is a solution that can help you regain financial stability. Each option comes with its pros and cons, so take the time to evaluate your situation carefully. Ultimately, though, the most important thing is to take action, as ignoring debt will only make it worse. By exploring your options and making an informed choice, you can start on a path toward a healthier financial life.