Alternatives to Debt Settlement: Other Ways to Manage Debt

Top alternatives to debt settlement include credit counseling, debt management plans (DMPs), debt consolidation loans, creditor hardship programs, direct negotiation and, in serious cases, bankruptcy.

Your top option largely depends on the severity of your debts, the status of your accounts, the strength of your credit, and your cash flow. It’s also important to assess your risk appetite, as many options, like debt settlement, carry serious tradeoffs.  

This guide will cover the pros, cons, costs and more of the major alternatives to debt settlement, so you can firm up and feel positive about your payoff plan.

Key Takeaways

• Credit counseling is the leading alternative to debt settlement. Nonprofit credit counselors can roll your unsecured debts into one monthly payment through a debt management plan, often at a lower interest rate — InCharge says counselors typically negotiate card rates down to about 8%, compared with the 20% to 30% many struggling cardholders pay.

• A debt management plan avoids long-term credit damage. Unlike debt settlement, which can stay on your credit reports for up to seven years, and bankruptcy, which can stay up to 10 years, a debt management plan carries no built-in negative mark as long as you make payments on time.

• Most plans take 3 to 5 years and charge modest fees. A debt management plan generally runs three to five years, with an average monthly fee around $34 and a one-time setup fee averaging $52, though both vary by state.

• You can negotiate with creditors yourself for free. The FTC notes you can call your credit card company directly to ask for a lower interest rate or a payment plan — you don't need to pay a company to do it for you.

• A debt consolidation loan can simplify payments. Banks, credit unions and other lenders may offer a single loan to repay multiple debts, potentially at a lower rate — but watch for teaser rates, fees and longer terms that can raise the total cost.

• Bankruptcy is a last resort with lasting effects. Chapter 7 and Chapter 11 filings can remain on your credit report up to 10 years and Chapter 13 up to seven years, so it is generally considered only after other options.

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Best Alternatives to Debt Settlement at a Glance

This chart quickly summarizes the paths you can pursue to debt relief in lieu of debt settlement.

Importantly, these alternatives don’t all work the same way. Some, like credit counseling and debt consolidation, focus on making monthly payments more manageable, so you can better control balances and avoid credit score missteps. Others, like direct negotiation and bankruptcy, focus on reducing large, expensive balances to an amount you can resolve through an agreed-upon settlement or a court-supervised discharge.

Lower-Risk Options To Try Before Debt Settlement 

Debt settlement involves hiring a for-profit company to negotiate with your creditors in an attempt to reduce what you owe. 

It’s best as a late-stage option for people experiencing severe financial hardship, as results aren’t guaranteed and trade-offs are significant. Debt settlement can kickstart collection efforts and hurt your credit score, for instance.

Fortunately, there are lower-risk alternatives. 

Start With Nonprofit Credit Counseling

Many nonprofit credit counseling agencies offer free budgeting and debt management advice if you're feeling overwhelmed. 

Setting up a consultation with one is a good first step if your debts still feel manageable or you're not sure of what relief option to commit to. A counselor can review your income, expenses, balances and suggested next steps. You can find an accredited counselor in your state through the U.S. Justice Department or the National Foundation for Credit Counseling (NFCC).

Notably, credit counseling won't reduce or eliminate your debts. You'll have to put in the work and commit to a leaner budget or more disciplined spending. Plus, if your debts are severe, you might need to take more drastic actions. 

Consider a Debt Management Plan

Those actions could include asking your credit counselor about setting up a debt management plan (DMP). 

In this scenario, they negotiate with your creditors to consolidate multiple balances into a single, more manageable monthly payment. You then make that monthly payment to the credit counseling agency, which allocates the funds to the appropriate creditors, usually over three to five years. Agencies typically charge a one-time setup fee of $30 to $50 and monthly maintenance fees of $20 to $75 for this service.

DMPs are functionally similar to debt settlement, as both involve negotiations that may reduce your obligations. 

However, credit counselors focus on securing better terms, like longer repayment periods, lower monthly minimum payments, fewer fees and better interest rates. Debt settlement companies aim to reduce your total principal balances.

Ask Creditors About Hardship Programs

Credit card issuers, lenders, mortgage servicers and even debt collection agencies may offer hardship programs that provide relief to distressed borrowers, usually in the form of payment deferrals, reduced monthly payments, frozen fees or lower interest rates.

These programs are temporary. They typically range from three to 12 months, though some large creditors offer longer alternative repayment windows of up to four years. Still, they can help prevent debts from steamrolling after an unexpected loss of income, a costly financial emergency, a medical issue or another short-term setback.  

Creditors don’t always advertise hardship programs, so it's a good idea to ask about one, even if you don't see the option on their website. Before signing up, be sure to ask:

• How long can the hardship program last?

• What proof of hardship is required?

• Are payments fully deferred?

• Do fees and interest accrue while in effect?

• Will deferrals or lower monthly payments show up on my credit report?

• What are my options after the hardship program ends?

Other Ways to Restructure or Reduce Debt

If your debts are longer-term or more severe, these steps might help.

Use Debt Consolidation Carefully

You might be able to lower your total borrowing costs and consolidate debt into one, more manageable monthly payment by taking out a top debt consolidation loan or opening a balance transfer credit card.

This option works best if your credit is still good enough to qualify for lower-interest financing with affordable monthly payments — and if you’re committed to disciplined spending. Otherwise, you’re at risk of ending up with higher outstanding balances, particularly if you use a loan to pay off reusable revolving credit lines.

Negotiate Directly With Creditors

You don't have to tap a credit counselor or debt settlement agency to negotiate with your creditors; you can do so yourself — and not simply to inquire about hardship programs.

Sometimes, creditors and debt collectors will agree to accept less than what they’re owed, particularly in exchange for an immediate lump sum payment.

Of course, this route requires some legwork and persistence. To increase your odds of success:

• Confirm what you owe — and with which creditor.

• Calculate and offer a settlement you can truly afford to pay.

• Log all calls.

• Get any and all agreements in writing.

Know When Bankruptcy May Be the Cleaner Option

Bankruptcy is the legal process of restructuring and reducing your debts. It’s generally considered a last-resort option for beleaguered borrowers, as it carries high financial costs and credit risks.

But it offers some legal protections that debt settlement does not. For instance, creditors must legally pause collection attempts and wage garnishments once you file. 

So, if you have debt that you can't reasonably expect to repay and are at risk of or already dealing with lawsuits and wage garnishment, it may be worth exploring bankruptcy with a licensed attorney.

How To Choose the Right Alternative to Debt Settlement

Choosing between debt settlement and its alternatives is tied directly to the severity of your current financial situation.

When balances are still relatively manageable and your cash flow or credit is still sound, you have time to pursue credit counseling, debt consolidation and hardship programs that can reduce total borrowing costs with minimal risks. 

If you’re already behind on payments, getting calls from collectors or simply have more debt than you can repay, you’re likely facing a riskier or more onerous type of debt relief, like bankruptcy, direct creditor negotiation, or a DMP, which, while less risky than debt settlement, can still negatively impact your credit.

Choosing the Right Debt Settlement Alternative

Still unsure whether you should pursue a debt settlement alternative? You can try mapping your current situation to the following scenarios. 

• If you’re unsure of your overall financial health and where to start, consider credit counseling. 

• If your financial distress is related to short-term income gaps or temporary setbacks, consider enrolling in a creditor hardship program. 

• If you have good credit and multiple high-interest balances, consider debt consolidation.

• If you’re dealing with delinquent accounts and want to reduce what you owe without paying for professional assistance, consider direct creditor negotiation. 

• If you prefer professional help negotiating with creditors and can still afford some type of monthly payment, consider a DMP. 

• If you’re struggling under debts you can’t repay and facing delinquent accounts, lawsuits, judgments and garnishment, consider bankruptcy.

What To Check Before Moving Forward

Before committing to a debt settlement alternative:

• Determine how much and what types of debt you have. 

• Calculate “realistic” monthly payments. 

• Check your credit.

• Understand how your score might be affected by each option.

• Pre-qualify for debt consolidation loans to gauge offers.

• Identify creditor hardship programs.

• Ask firms or agencies for full cost estimates: fees, taxes, monthly obligations.

• Confirm account status — and your risk of collections, lawsuits or judgments.

• Review written loan or service agreements.

Bottom Line

Debt settlement can yield results, but they’re not guaranteed, and the move carries significant risks, like accelerated debt collection efforts or credit score damage. That’s why it's important to understand and carefully consider your top alternatives, including do-it-yourself repayment strategies, credit counseling, debt consolidation or, when debt is truly unmanageable, bankruptcy.   

FAQs

Is credit counseling better than debt settlement?

Credit counseling isn’t necessarily better than debt settlement, as it focuses on managing debt rather than reducing it. That move might be enough if you have adequate cash flow and affordable balances, but it may fall short in more extreme circumstances. Ultimately, whether one option is better than another depends on your financial situation.  

Can I avoid debt settlement if my accounts are already late?

You might be able to avoid debt settlement while still getting some relief on delinquent accounts by pursuing creditor hardship programs or direct creditor negotiations. 

Is debt consolidation a good alternative to debt settlement?

Debt consolidation is a good alternative to debt settlement if you can realistically afford to pay and qualify for a new loan with favorable terms. It’s less ideal if you’re no longer capable of making monthly payments or are at risk of running up new debts after paying off old ones.

What's the safest alternative to debt settlement?

Nonprofit credit counseling and creditor hardship programs are the safest alternative to debt settlement in that they're generally free and should have little to no effect on your credit. 

When should I talk to a bankruptcy attorney instead?

You should consider consulting a bankruptcy attorney if debts are unmanageable and have resulted in collection efforts, lawsuits, judgments and garnishments. Bankruptcy provides certain legal protections against certain consequences while your debts are restructured.

Key Terms

• Debt settlement: A program, usually run by a for-profit company, that tries to get creditors to accept a lump sum that is less than what you owe — often by having you stop payments, which can add fees and damage your credit.

• Debt management plan (DMP): A structured repayment plan set up by a nonprofit credit counseling agency that combines your unsecured debts into one monthly payment, often with reduced interest rates and waived fees.

• Credit counseling: Guidance from a usually nonprofit organization that helps you build a budget, manage debt and, when appropriate, set up a debt management plan.

• Debt consolidation loan: Money you borrow to pay off multiple debts so you make one monthly payment, sometimes at a lower interest rate than your current debts.

• Unsecured debt: Debt that is not tied to collateral — such as credit cards, personal loans and medical bills — and the type a debt management plan can include.

• Statute of limitations: Typically three to six years depending on the debt type and state, during which a creditor or collector can sue you to collect a debt.

• Credit utilization ratio: How much of your available credit you are using — a factor that can spike if a plan requires you to close card accounts, then improve as balances drop.

• Bankruptcy: A court process that can discharge certain debts, with Chapter 7 liquidating nonexempt assets and Chapter 13 setting up a court-approved repayment plan over three to five years.

Sources

• How To Get Out of Debt — Federal Trade Commission

• What is a debt relief program and how do I know if I should use one? — CFPB

• What is credit counseling? — CFPB

• Difference between credit counseling and debt settlement, consolidation or repair — CFPB

• Can debt collectors collect a debt that's several years old? — CFPB

• List of Credit Counseling Agencies Approved Pursuant to 11 U.S.C. § 111 — U.S. Department of Justice

• Bankruptcy Types and Their Impact on FICO Scores — myFICO

• How a Debt Management Plan Can Impact Your FICO Scores — myFICO

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