What You Need to Know About Debt Relief Options: Consolidation, Settlement and Bankruptcy

When exploring debt relief options, the biggest mistake many people make is not looking at all options. In order to avoid this mistake, I suggest you set aside any preconceived notions and seek objective advice from a debt relief professional who is understands all forms of debt relief, from bankruptcy to debt settlement and everything in between.

People struggling with debt often feel like they are under attack from their inability to make debt payments. For the vast majority of people in debt, this feeling stems from the fact they always intended to pay their debts (however onerous those terms may be). The emotional toll paid by these people is a reflection of their best intentions.

Unfortunately, these feelings often prevent people from taking appropriate action to deal with their situation. Rather than efficiently redirecting their life for the betterment of their family’s future, people often chose to suffer through inaction or pursue half-measures. For many, this means they take bankruptcy off the table.


Companies who specialize in debt consolidation prey on this dynamic. These companies advise you to pay thousands in fees and even more to your creditors through consolidated payment plans. They rarely, if ever, advise on the alternatives to consolidation or the risks of debt consolidation. The risks of consolidation are:

i) that the debtor cannot afford the consolidation payments because they are based on demands of creditors and not what the debtor can afford; or
ii) that some creditors don’t participate in the consolidation plan .

At best, these tactics by debt consolidation companies cause people to over-pay for debt relief. This overpayment stems from the fact that alternatives to debt consolidation are usually cheaper. At worst, the failure of debt consolidation companies to give objective advice causes people to waste time and money only to fail at achieving debt relief. When this happens, you get sued by creditors without being prepared and end up right back at square one only you are out the money paid for consolidation.


Most debt consolidation companies will not even mention bankruptcy as an option to their clients. This is like teaching someone how to drive in a nail without mentioning the hammer.

For most people, bankruptcy is far and away the most cost-effective means of debt relief. Bankruptcy is essentially a legal bargain to get out of debt. Because the protections provided by the bankruptcy laws are designed to leave you with enough income and property for a fresh start, bankruptcy usually costs little to nothing more than attorney’s fees and costs (typically less than $2,000 total).

When one has income or property beyond the limits set in the law, debtors typically repay only a small portion of their debt in bankruptcy. This exposure is generally predictable and debtors with a good attorney should almost always know what their bankruptcy will cost them before it is filed.

Even when one has higher income or significant amounts of property, paying back all of their debt in bankruptcy is often cheaper than debt consolidation because interest on unsecured debt stops accruing when one files bankruptcy. This means that you can lock in your unsecured debt balances on the day you file bankruptcy and pay that balance off.


Debt settlement is an option that must be considered if you are going to pay back a large amount of debt in bankruptcy because of high income or a large amount of non-exempt property. On the surface, debt settlement is similar to debt consolidation. Both entail re-negotiating terms with your creditors. However, the basis of debt settlement is a lump-sum payment to the creditor instead of a repayment plan, which is the basis of debt consolidation.

This distinction can lead to significant savings. If you have or can save the lump-sum required for debt settlement, you can typically settle the balance owed to a creditor for 50% or less. On the other hand, you will usually pay 100% of the debt back plus some interest in debt consolidation. While many may not have the settlement funds available in cash, you may be able to get it from a retirement account (which can make sense if bankruptcy is not a good option) or you may have more time to save than you think.

This is because, in most cases, you can stop making payments to your unsecured creditors in preparation to save money to settle debts. In the many months it usually takes for the unsecured creditor to do something (other than call you and send letters) after you stop paying the debt, you can be saving the money you would have paid them to offer a lump-sum settlement payment.

By the way, if saving or coming up with the settlement money is impossible or undesirable, then bankruptcy is very likely the most cost-effective solution for you.


Occasionally, people in debt require some combination of debt relief options. For example, many need help only with their mortgage. In such a case, mortgage modification may be all the debt relief they need. However, because the pursuit of mortgage modification can risk foreclosure if the modification is denied, a solid plan B is required. That plan B is often a chapter 13 bankruptcy, in which the debtor can stop foreclosure and make up missed mortgage payments (or even re-apply for mortgage modification).


If you are struggling with debt, I encourage you to focus on your financial future. Consider all options, including bankruptcy. Take the time to find out how the debt relief options mentioned in this article apply to your financial situation and your goals. Finally, seek out credible debt relief professionals by reading reviews or finding referrals. Unfortunately, many service providers (not just in debt relief) lack the knowledge or integrity to give you objective advice.

My wife and I are debt relief attorneys who have our own firm, Wink & Wink. We offer free consultations. We meet with hundreds of people struggling with debt every year. At these meetings, we take the time to understand the debtor’s situation and goals. We then provide an explanation of the debtor’s options and objective advice on the most cost-effective solutions for them. Make sure that whoever you choose to advise you offers a similar approach.