How to Get Out of Debt with Bad Credit

You applied for a consolidation loan. They said no. Or you knew before you applied that the answer would be no, so you didn't even bother. Either way, you're carrying real debt, your credit is damaged, and the advice you keep seeing (consolidate your balances, do a balance transfer) doesn’t help at all

Bad credit closes some doors. But it leaves others open.

Which path makes sense mostly depends on one thing: whether your income is still covering your payments, or whether things have already gone past that point. Both situations have debt relief options available.

Here’s a quick map before we go deeper. Every option below is accessible regardless of your credit score. That’s the point.

If your credit is bad but your income is stable

Bad credit can happen even if you have steady income. If that’s still stable, you have a few paths here. None of them require a good credit score.

Choose a repayment strategy and tackle it yourself

Sometimes a solid plan is the difference between floundering and progressing. If your income is enough to cover your minimums with a little extra, a good repayment strategy could be all you need to save time and money.

Two popular strategies depending on your goals:

• Debt avalanche: This is the one to pick if you want to save the most money. Make the minimum payment on all your debts. Then, focus any extra money onto the debt with the highest interest rate. Once it’s paid off, all that money can go toward the debt with the next-highest rate. And so on.
• Debt snowball: Choose this method for the quickest win. It’s just like the avalanche, but you focus extra cash on the debt with the smallest balance first instead. Then, the next-smallest balance. And so on.

How much progress you make will depend mostly on how much extra cash you have to put toward your debts. However, this path could also have another benefit: On-time payments and lower card balances could have a positive impact on your credit scores. Six months to a year of doing it yourself could help you unlock a consolidation loan at a lower rate to speed up repayment down the line.

Look into a debt management plan

A debt management plan (DMP) is a program run by nonprofit credit counseling agencies. It’s not a loan. Eligibility is based on your budget and debt load, not your credit score.

Here’s how it works: A certified credit counselor reviews your finances and contacts your creditors on your behalf. The counselor may be able to negotiate lower interest rates or waived fees. You make one monthly payment to the agency, and the agency distributes it to your creditors.

Plans typically take three to five years to complete. Most creditors require you to close enrolled accounts as part of the process—this can temporarily raise your credit utilization ratio (how much of your available credit you’re using). This method doesn’t reduce what you owe, but having one structured payment and a clear payoff timeline could make it more manageable.

If you’re already behind and repayment isn’t realistic

All the plans and budgets in the world can’t help you if your debt is simply beyond your ability to repay in full. Here’s what could.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is a legal process that could let you walk away from most unsecured debt: credit cards, medical bills, and personal loans included. 

Most straightforward cases resolve in about four to six months. Bankruptcy stays on your credit report for up to 10 years.

To be eligible, you must pass the means test. It looks at your income relative to the state’s median. If you’re over that line, the focus becomes your disposable income—your monthly income minus allowable expenses. You may not be eligible if your income is too high compared to your expenses and debts.

Chapter 13 bankruptcy may be more appropriate if your income is too high or you have assets to protect. It involves a repayment plan rather than a blanket discharge. A free consultation with a bankruptcy attorney should tell you more about your specific options, and many offer that first conversation at no charge.

Debt settlement

Debt settlement works differently from bankruptcy. Instead of a legal discharge, you negotiate with creditors to accept less than the full balance, and the remaining amount is cancelled. You could do this yourself or hire a professional debt settlement company.

The first account could be settled within a few months; settling all enrolled debts typically takes at least two to four years. Settled accounts are noted as settled for less on your credit report for up to seven years.

Unlike bankruptcy, debt settlement doesn’t give you any protection from lawsuits. Creditors could still sue you while you’re saving up for or negotiating a settlement. Additionally, whether you do it yourself or hire a company, forgiven debt may count as taxable income. Consult a tax advisor before going this route.

Bills Action Plan

Step 1: Identify your situation. Are you still making payments, or have they already stopped? If you’re current and have steady income, you may have more options.

Step 2: If you’re still making payments, take a serious look at your budget. If a DIY repayment strategy fits, pick one and start this week. If a DMP looks right, find an NFCC member agency for a free session.

Step 3: If payments have already stopped, start with a free consultation from a bankruptcy attorney. They can assess whether Chapter 7, Chapter 13, or settlement fits your situation.

Key Terms

Discharge: A court order that legally eliminates your personal liability for eligible debts. Once a debt is discharged in Chapter 7, creditors can’t attempt to collect it.

Means test: The calculation used to determine whether you are eligible to file for Chapter 7 bankruptcy. It compares your average monthly income over the past six months to your state’s median income for your household size. If your income is above the median, it also considers your reasonable expenses and disposable income.

Unsecured debt: Debt that isn’t backed by collateral or something of value you own. Credit cards, medical bills, and personal loans are common examples. Most debt relief options, including DMPs, settlement, and Chapter 7 bankruptcy, apply primarily to unsecured debt. This article is for general education. We can’t advise you on whether to file for bankruptcy protection or which chapter is right for you. Consult a bankruptcy attorney for advice specific to your situation.