Skip to content
EquityPeek
See my equity

GuidesDebt resolution3 of 6

Debt resolution vs. consolidation, counseling and bankruptcy

Four ways to deal with debt you cannot keep up with. What each one pays back, how long it takes, what it does to credit, and who can actually use it.

01Four paths, one question

Every one of these deals with the same problem: more unsecured debt than the budget can carry. They differ in whether you pay the full balance, how long it takes, what it costs your credit, and whether a lender or a court has to say yes. The question that sorts them is whether you can still borrow at a rate well under the cards.

Side by side
Consolidation loanDebt management planDebt resolutionChapter 7 bankruptcy
What you pay back100%, at a lower rate100%, at reduced rates40 to 60% plus fees0% on discharged debt
How long2 to 7 years3 to 5 years2 to 4 years3 to 6 months
Credit impactSmall, often positive over timeSmall to moderateLarge, 100 points or moreLargest, stays 10 years
Who can use itCredit roughly 640 or better, income to carry itAnyone who can afford full repaymentAnyone with enough unsecured debt and a depositIncome under the state median, or a means test
CostInterest, 8 to 20%$0 to $75 a month15 to 25% of enrolled debt$1,500 to $3,500 in fees
Stops lawsuitsYes, accounts are paidUsually, while you stay currentNoYes, by law

02The consolidation loan

A personal loan or a line against the house pays off the cards and replaces them with one payment at a lower rate. You still owe every dollar. The win is the rate and the single due date. It needs credit, usually 640 or better for a personal loan and 660 or better for a line, and income that can document. If you qualify, it is almost always the cheapest of the four, and it leaves credit alone. Using equity for cards covers the secured version and its one real risk.

03The debt management plan

A nonprofit credit counselor negotiates lower interest rates, often down to 6 to 10%, and you make one monthly payment to the counselor, who pays the creditors. The balances are paid in full over 3 to 5 years. Fees are small. Enrolled cards are closed, which costs some points, but no account goes late. It fits people whose problem is the rate, not the balance: you can afford to repay, just not at 25%.

04Debt resolution

The full resolution guide walks this one. In short: accounts go unpaid, a negotiator settles each for 40 to 60% of the balance, and you pay a fee of 15 to 25% of the enrolled amount after each settlement. It is the only one of the four with no credit minimum and no court. It costs the most in credit damage short of bankruptcy, and a creditor can sue during the program.

05Bankruptcy

Chapter 7 discharges most unsecured debt in 3 to 6 months and stops every lawsuit and collection the day it is filed. It stays on the credit file 10 years, requires passing a means test tied to state median income, and can put some assets at risk depending on state exemptions. Chapter 13 is a 3 to 5 year court-supervised repayment plan for people with too much income or too much equity for Chapter 7. For someone with a large balance, no way to pay it, and a lawsuit already filed, bankruptcy can cost less than resolution. A bankruptcy attorney, many of whom offer a free first consultation, can say which chapter applies.

06How to pick

  • You can borrow at a rate well under the cards and the balance would be paid in 5 years: the consolidation loan.
  • You can afford the full balance at a lower rate but not at the card rate: the debt management plan.
  • You cannot afford the full balance and want to stay out of court: debt resolution.
  • You cannot afford a settlement deposit either, or a lawsuit is already moving: talk to a bankruptcy attorney before enrolling anywhere.

See where you actually land

Your address, a value and equity range, then the paths that fit. About a minute, and no credit check.

See ways to clear debt

Related

  1. Debt resolution: the full guideWhat debt resolution is, who it fits, how a program runs month by month, what it costs in fees and credit, and where it stands against borrowing on the house.
  2. Should you use home equity to pay off card debt?Moving card balances onto the house can lower the rate. It also puts the house behind the debt. Sometimes the better move is to reduce what you owe.
  3. Home equity line of credit: the full guideWhat a HELOC is, who gets one, how the process runs week by week, what it costs, and where it loses to the other ways of getting money out of a house.

This path, in order

Debt resolution: the full guide

  1. 01Should you use home equity to pay off card debt?Moving card balances onto the house can lower the rate. It also puts the house behind the debt. Sometimes the better move is to reduce what you owe.
  2. 02What debt resolution does to your creditScores often drop 100 points or more. Late marks and charge-offs stay 7 years. Recovery usually starts 12 to 24 months after settlements. Here is the shape of the damage and the rebuild.
  3. 03Debt resolution vs. consolidation, counseling and bankruptcyYou are here
  4. 04What debt resolution really costsFees run 15 to 25% of enrolled debt, charged after each settlement. Add the interest that piles up while you wait, and the savings are real but smaller than the headline.
  5. 05Forgiven debt and taxes, in plain termsWhen a creditor forgives $600 or more, a tax form usually follows, and the amount may count as income. The outline, including the insolvency exception, without the advice.
  6. 06Which debts can go into a resolution program, and what can happen to themCards, personal loans and medical bills can be enrolled. Mortgages, car loans and federal student loans cannot. What enrolled accounts go through, from collections to a possible summons.