Four Options for Dealing With Your Debt (and How to Choose the Right One for You)

If you're struggling with debt, you're not alone—the average American has more than six figures' worth (including mortgages and student loans). When attempting to tackle that number using a debt avalanche or snowball method on your own isn't enough, you might start researching specific debt relief programs available that can provide assistance.

That's great! However, each type of program has its own pros and cons that you should carefully consider, so you don't end up digging yourself even deeper into debt. Here's what you need to know about the pros and cons of four different debt relief options, so you can choose one that will be a good fit for you.

Debt settlement

Debt settlement programs can make a huge difference—they usually promise to negotiate with your creditors on your behalf to lower your interest rates, structure lower payments, and help you set up a payment plan that will get you out of debt over time, and while staying within your budget.

However, the Consumer Financial Protection Bureau warns that dealing with companies that provide these services can be risky, and other options should be considered as well (more on those below).

Pros of debt settlement programs:

• Can potentially reduce the total amount of debt owed through negotiation with creditors

• May allow you to pay off debt faster than other options

• Can stop collections calls and lawsuits from creditors

Cons of debt settlement programs:

• Damages your credit score, sometimes significantly

• Creditors are not obligated to agree to a settlement

• Debt settlement companies often charge high fees

• Settled debts may be reported to the IRS as taxable income

Debt consolidation

When you're dealing with multiple sources of outstanding debt, consolidating those debts into a single payment can seem like an attractive solution. Debt consolidation is the process of combining multiple credit card balances or other types of debt into a single new loan (or a single credit card) with a lower interest rate.

Pros of debt consolidation:

• Simplifies repayment by combining multiple debts into a single, lower-interest loan

• Can lower your monthly payments

• Stops collections calls from individual creditors

Cons of debt consolidation:

• May require you to take out a new loan, which can come with origination fees

• The new loan may have a longer repayment period, meaning you'll pay more in interest over time

• Does not immediately reduce the total amount of debt owed

Bankruptcy

In general, people file for bankruptcy only as a last resort. Many assume bankruptcy is just for people who take on too much credit card debt, and while this can be true, people also file bankruptcy after suffering a major, unexpected financial blow—like a lawsuit or a catastrophic illness.

Pros of bankruptcy (what an amazing phrase):

• Provides a legal path to eliminate or restructure unmanageable debt

• Can stop foreclosure, garnishment, and other collections actions

• May allow you to keep certain assets, like your home or car

Cons of bankruptcy:

• Severely damages your credit for 7-10 years

• Remains on your credit report for an extended period

• Filing for bankruptcy is a matter of public record

• Certain debts, like student loans, may not be dischargeable

Debt management programs

Not to be confused with a debt settlement program, a debt management plan groups several credit card debts into one payment, cuts your interest rate, and creates a 3- to 5-year repayment plan. These plans are offered by credit counseling agencies. If you’re thinking of going this route, look for an agency that’s a nonprofit and accredited by the National Foundation for Credit Counseling.

Pros of debt management programs:

• Can lower interest rates and monthly payments through negotiations with creditors

• Stops collections calls and lawsuits from creditors

• Allows you to pay off debt in a structured, organized way

Cons of debt management programs:

• Requires you to close credit card accounts, which can negatively impact your credit score

• Success depends on your ability to make the agreed-upon monthly payments

• Debt management companies typically charge setup and monthly fees

How to choose the right option to deal with your debt

As always, if you aren't sure which option to choose, it will also be helpful to consult with a financial advisor or credit counseling agency to help you determine the best course of action. Whichever program you choose, the key is to act quickly and responsibly to regain control of your finances.

And before you assume you’re on the hook for a debt, it’s usually worth it to take a breath and dig in to confirm you're actually required to pay it. Here's a primer on how you can make ensure you're responsible for all those debts in the first place.