What Are My Debt Resolution Options?

What are all of the pros and cons of each debt resolution or debt consolidation option?

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Bill's Answer: Answered by Mark Cappel

The four primary concerns for most consumers are: i) monthly payment, ii) time to debt freedom, iii) total cost, and iv) the credit rating impact of the resolution program. Be sure to evaluate each program relative to your prioritization of these factors.

Since there are a variety of debt resolution options, including credit counseling, debt negotiation/debt settlement, a debt consolidation loan, bankruptcy, and other debt resolution options, it is important to fully understand each option and then pick the solution that is right for you.

Credit Counseling

Credit counseling, or signing up for a debt management plan, is a very common form of debt consolidation. There are many companies offering credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. Because the program lowers interest rates, it less effective for someone whose interest rates are already low.

It is important to understand that in a credit counseling program, you are still repaying 100% of your debts -- but with lower monthly payments. On average, most credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy -- or using a third party to re-organize your debts.

Debt Settlement

Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs are geared for people who have a financial hardship that makes it so they either cannot pay their bills or are about to start falling behind. Debt Settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are not paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.

Debt Consolidation Loan

Many people think first of a debt consolidation loan when seeking debt consolidation. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt.

It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation, if there is ever a chance that you cannot afford the new mortgage payment you are now putting yourself at risk of foreclosure! In the case of a debt consolidation loan, most mortgages are 30-year loan, which means that the total cost and the time to debt freedom could be very high, but the monthly payment will be lower than other options and there is no credit rating impact.


Bankruptcy may also solve your debt problems. A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort. Since bankruptcy reform went into effect, it is much harder to file for bankruptcy chapter 7. It may be the case that a Chapter 13 bankruptcy will be the only one available. In a Chapter 13 bankruptcy, a person's debts are reorganized. The debts are repaid, according to the terms established by the bankruptcy court. Chapter 13 bankruptcies usually run three to five years. If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.


You may be curious what may happen if you do nothing. If you stop paying your unsecured debts, creditors have the right to collect the debt. First, you will likely receive collection calls and letters from the creditor directly. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors, so do not be surprised if the calls become more persistent, or even threatening. Thankfully, the Fair Debt Collections Practices Act has rules governing the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules.

In some cases, when all other collection efforts fail, a creditor will decide to file a lawsuit against the debtor. This is not a frequent occurrence, but it is within a creditor's rights and a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor's favor. Depending on your state's laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, place a lien on your property, or take other action to enforce its judgment.

Regarding a credit report, default damages a credit score severely. In addition, default is a warning flag for many lenders, who will refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a poor option for most consumers.


Although there are many forms of debt consolidation, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation. However, each consumer is different, so find the debt consolidation option that fits for you.

Lastly, here are some fast tips for your own quick Debt Consolidation Evaluator:

1. If you have perfect credit and have equity in your home -- consider a Mortgage Refinance.

2. If you can afford a healthy monthly payment (about 3 percent of your total debt each month), your interest rates are a problem, and you want to protect yourself from collection and from going delinquent -- consider Credit Counseling.

3. If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections -- then evaluate Debt Settlement.

4. If you cannot afford anything in a monthly payment (less than 1.5 percent of your total debt each month) -- consider Bankruptcy to see if Chapter 7 might be right for you.

Bills.com makes it easy for you to apply for traditional forms of debt relief.

I hope this information helps you Find. Learn & Save.




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Comments (33)

K.W. M.
Columbia, SC  |  December 06, 2013
I'm having a bit of an issue with a creditor for student loans, which is no one's fault but my own. I am currently unemployed but beforehand the creditors were garnishing my wages & since these are not federal loans I've been advised they could not be consolidated. I have no idea where to go from here. Is there a way out of the garnishments when I get back into the workforce?
December 06, 2013
See the Bills.com article State and Federal Laws May Help You Stop a Student Loan Wage Garnishment to learn more about student loans and wage garnishment. Please ask any follow-up questions you may have on that page.
Erica S.
Tracy, CA  |  November 28, 2013
I owe $5,599 to a motor credit company. I do not have that kind of money, and can barely pay my other three credit card debts. Would debt consolidation be my best answer? I am afraid they will go after my paycheck.
December 02, 2013
You mentioned a $5,599 balance due to a "motor credit company." If this is a car-purchase or title loan, in other words the loan is secured by your car and the lender has the right to repossess the vehicle, then you have a complicated situation. Talk to a reputable debt settlement company about your accounts to learn whether the $5,599 account can be included in a debt settlement program.
Jonathan C.
Los Angeles, CA  |  August 07, 2013
I have a $15,000 credit card debt and just got an offer from a collection agency to settle it if I only pay 15% of the total, which seems like an insane deal. But as far as I understand, it is past the 4 year statute of limitations for California, and that it won't necessarily improve my credit score much since it stays on my record for 7 years anyways. I also have another $5,000 debt from a different credit card company that's past the SOL as well.

I've read your articles about the SOL and know they can still sue, etc. but I guess I'm wondering if it's worth paying this settlement amount even though it may not improve my credit score much? Thank you for all your information.
August 07, 2013
Two contradictory answers to your question:
  1. The Fair Isaac & Co. FICO scoring model does not reward you for paying off delinquent debts. Once the delinquency hits, the damage is done, period. Only time can heal a wound in the FICO world.
  2. VantageScore 3.0, which was released in the spring of 2013, removes the damage caused by a delinquency when the account balance is paid or resolved. VantageScore rewards the conscientious.

Few lenders use VantageScore. In fact, if you're looking for a mortgage or refinance, virtually no home loan lenders pay attention to VantageScore.

Is it worth your while to rid your self of the debt? From a credit score perspective, the answer is no. A settlement will remove your legal liability for the debt, which may make you sleep easier at night knowing you will not receive an unwelcome telephone call from a collection agent in the morning.

Beth G.
Hicksville, OH  |  July 17, 2013
We have about $30,000 in credit card debt, and are thinking of debt consolidation. We can barely make the monthly payments, let alone make the payments on our other expenses. What happens after you are enrolled in debt consolidation and we would need to charge something, such as car repairs or school fees for kids, or anything else that we wouldn't have the money for?
July 17, 2013
You do not need to enroll all of your credit cards in either a debt settlement or credit card counseling program. It is common for people enrolled in either type of program to leave one card out — one with hopefully a zero or low balance.

In an ideal situation, you would create thorough and accurate household budget that would include a reserve for the expenses you mentioned.
Kasey G.
Amarillo, TX  |  January 31, 2013
I have 14 negative accounts and 1 in collections, all from my younger/naive years. What is the best way to pay these off and get them off of my credit report? I can pay most of these in full as they are small amounts, but I heard negative experiences from numerous people still being harassed after paying in full (the collector kept trying to get additional money even though it was paid in full). I want to avoid this at all costs, just pay off the debt and get it off of my credit. Any advice is definitely appreciated!
February 01, 2013
The phrase, "Get it in writing" applies here. Negotiate a settlement with each original creditor or collection agent on the telephone, and explain your concern to the negotiator. Tell them you want a clearly written agreement in writing using the magic word "settlement" and printed on their company's letterhead. A phrase like the following spells out the intent of the parties clearly:
(Your name) promises to pay (name of collection agent or original creditor) the amount of ($XXX.XX) as a final settlement for (name of account, if any) account number (ABC123). Upon receipt of (your name)'s payment, (name of collection agent or original creditor) promises to notify Equifax, Experian, TransUnion, or any other consumer credit reporting agencies it has reported this collection account to, that the debt status shall be set to "Paid as agreed" or a substantially similar status. Because this account is settled (name of collection agent or original creditor) agrees it has no further right to collect or assign the account.

Edit what I just shared here to make it fit your circumstances.

Keep copies of your settlement agreements and payments. Should an unscrupulous collection agent try a second bite at the apple, so to speak, send it a copy of the settlement agreement with an explanation that the collection agent is in breach of contract, and any further attempt to collect the debt will result in you taking civil action in your state's court of law.

Jennifer R.
Tuscaloosa, AL  |  June 25, 2012
I have 2 big credit cards and the total balance together are about 21,000. I have been contacted by a company on doing a debt consolidation. I'm considering it but my husband told me to look them up on the BBB. Well they are rated a C with many complaints. I'm not sure what to do. The idea of cutting my credit card debt in half is great and I really want to do it but not sure if it's the smart thing to do. So, is it just that easy to cut the credit card debt in half and me just make payments for 2 years which I fully intend on cutting that 2 years to atleast into 1 1/2 years but double some payments. Need help on what is the right decision please.
June 27, 2012
Great question! Please see the Bills.com resource Reliable Debt Consolidation Companies for my answer to another reader who asked a similar question.

Regarding the BBB, this is problematic. Starbucks, for example, does not pay for a BBB membership, which results in no rating for the company. If we knew nothing else about Starbucks this would make us suspicious of Starbucks as a cafe. However, anyone who's ever visited a Starbucks knows the products they sell and the service offered are usually very high quality.

Which leads me to my point: the BBB rating is based on the total number of complaints, and not the ratio of complaints to the number of customers served. If the BBB rated Starbucks, it would probably have a very poor rating because if the BBB received one complaint per Starbucks location per year, Starbucks would have more than 15,000 complaints every year. This would seem terrible at first glance, but would be really a rock-bottom number based on the number of customers served daily.

My point is, take the BBB rating with a grain of salt.
Damebochie S.
June 05, 2012
These are some pretty good tips to help manage your debt and credit. I am currently trying to do that since I just started a job.
Erika P.
Los Angeles, CA  |  December 27, 2012
I found the article very helpful, too.
Chris C.
April 23, 2012
I live and am self-employed in California. Can a credit card company put a judgment against my business (LLC) bank account? Also, my wife has her own checking account. Can they put a judgment against it even though my Social Security number is not on that account and her SS# is not connected to the credit cards? Because California is a Community Property state, can they garnish her wages? I own 3 vehicles outright with the following resale values: $8,000, $7,000 & $6,000, can they repossess them? I owe $30k to Amex & $20k to Wells Fargo. They've both offered a 50% reduction, so total owed would be $25,000 if paid back in lump sums. Unfortunately, I can't afford that. Amex has accepted a 36-month payback for the full $30,000 but Wells Fargo wants $10,000 in 12 months. I have no equity in my home. Any suggestions?
April 25, 2012
If your LLC was created using the formalities required by the state, properly funded, operated according to state law, and was not an alter-ego for your own personal finances, then your LLC should be immune from your own personal finance difficulties.

In a community property state, a judgment creditor for Spouse A has the right to garnish the wages of Spouse B. This is a rare occurrence in practice, however.

The California exemption for personal vehicles is $2,300, and $4,850 for commercial.

My advice? Consult with a bankruptcy lawyer. I am not suggesting filing bankruptcy is the answer, but a bankruptcy lawyer will explore your LLC question, and discuss your other options.
Green M.
Paramount, CA  |  October 04, 2011
i have some debt on my credit report that i'm not responible for and doesn't relate to me
October 04, 2011
Dispute any inaccurate derogatories entries appearing on your credit report. Follow the link I just mentioned to learn how.
Adam A.
Houston, TX  |  August 23, 2011
I owe $26,000 on a motor home that we bought in 2008. I can not afford the payments and storage fees on it anymore. When I bought the RV I lived in California. I have recently moved to Texas but I am still using a family members address in California until I am settled. My wife and I are both unemployed, but will be working in the future. I would like to take my RV into a consignment dealership who did a phone appraisal of $11,000 to $18,000. Is it correct that now that I live in Texas they won't be able to apply a wage garnishment for the difference when we are working? I have an account with my name on it for my son who is under 18. Could they possibly take his money is there is a judgement against me for the balance in the future?
August 24, 2011
It is likely true that your wages will be exempt from garnishment, although there may be a period of time you need to live in Texas before the protections apply. Consult with an attorney for more details. If there is a judgment against yu, any account with your name on it is at risk, even for one you share with a minor

Try to work out a short-sale with the RV dealer. If you can get them to agree to allow you to sell the RV that may bring in more than if it is repo'd and auctioned, as well as reduce miscellaneous charges you may be hit with for the repo and storage.

Consider enrolling in a debt settlement program or negotiating a settlement for any deficiency balance that remains.
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