Debt relief options: how each one works, what it costs and how to choose

The short answer: debt relief is any way of making debt easier to repay: a lower interest rate, a lower monthly payment or a smaller balance. The main options, from least to most damaging to your credit, are a do-it-yourself payoff plan, a nonprofit debt management plan, a consolidation loan, debt settlement and bankruptcy. Start with the cheapest one that can actually clear your debt.

• Can you still make the minimums? Then a DIY plan, a rate cut or a debt management plan is usually enough
• Can't make the minimums? Talk to a nonprofit credit counselor before you sign with a settlement company or file for bankruptcy
• Never pay upfront fees. The FTC says a debt settlement company can't collect its fees before it settles your debt
• Free budget helper: get the free budget templates (we email them to you). Building a payoff plan? The Debt Payoff Planner is $6.99, or the Ultimate Budget Bundle is $19.99 ($46.42 when bought separately)

Checked against the FTC, CFPB and IRS on November 9, 2026. This is general information, not legal or tax advice. Below: every debt relief option side by side, what each one does to your credit and your taxes, how to spot a scam, and a worked example of the math.

Debt relief options at a glance

Option 1: do-it-yourself payoff

If you can cover your minimum payments and still have some money left, you may not need a company at all. List every debt with its balance, rate and minimum, then pick a method:

• Debt avalanche: extra money goes to the highest interest rate first. It costs the least in total interest.
• Debt snowball: extra money goes to the smallest balance first. Quick wins keep many people going.

Both work. Our full walkthrough is in how to get out of debt, and card-specific tactics (rate-cut calls, balance transfers, payment timing) are in how to pay off credit card debt. A debt tracker keeps every balance on one page so you can see progress.

Credit and tax effect: your score usually improves as utilization drops. Nothing is forgiven, so there is no tax bill.

Option 2: ask your creditor for a hardship plan

Before you hire anyone, call the creditor. Many card issuers and lenders have hardship options: a lower rate for a set number of months, a reduced payment, or a short pause. The CFPB notes that settlement companies often can't do better than you could negotiating yourself. Ask exactly how the plan will be reported to the credit bureaus, and get the terms in writing before you pay.

Option 3: nonprofit credit counseling and a debt management plan

A credit counselor reviews your income, expenses and debts and suggests a plan. If a debt management plan fits, the agency works with your creditors to lower interest rates or waive fees. You then make one monthly deposit to the agency, which pays your creditors. According to the FTC:

• DMPs cover unsecured debts such as credit cards and medical bills, not debts secured by your home or car
• Plans can take 48 months or more
• You may have to stop opening new credit while you're enrolled
• Nonprofit status doesn't guarantee low fees, so get fee quotes in writing and interview a few counselors

The CFPB adds that a legitimate counselor never tells you to stop paying your debts, and that a DMP usually doesn't affect your taxes. You still repay everything you borrowed, just at a lower cost. See our debt management plan guide for how enrollment works and what to ask a counselor.

Option 4: consolidation loan or balance transfer

Consolidation rolls several debts into one new loan or card, ideally at a lower rate. Common versions are a personal loan, a 0% balance transfer card, or a home equity loan or line of credit. The FTC warns that a secured loan puts your home at risk if you miss payments, and that costs can include interest and "points," where one point equals 1% of the amount borrowed. The CFPB warns that teaser rates can expire and that a longer term or fees can make the total cost higher.

Consolidation only helps if the new rate is truly lower and you stop adding new balances to the cards you paid off. Our debt consolidation guide covers how to compare offers and when consolidation backfires.

Option 5: debt settlement

Debt settlement companies, usually for-profit, try to get your creditors to accept a lump sum smaller than what you owe. You typically save money in a dedicated account while the company negotiates, and the programs often urge you to stop paying your creditors in the meantime.

The risks, from the FTC and the CFPB:

• Credit damage from late payments, plus extra fees and interest while you aren't paying
• Collection calls and lawsuits may continue, and some creditors may refuse to settle at all
• Dropping out can leave you having paid fees while still owing most of the debt
• Taxes: the amount forgiven may count as income

The rules protect you on fees: the company must tell you its fees, terms, timeline and risks up front, and it can't charge until it has actually settled a debt and you've made at least one payment under that settlement.

Option 6: bankruptcy

The FTC calls bankruptcy generally a last resort. There are two common types for individuals:

• Chapter 7 sells non-exempt assets to pay creditors and wipes out many remaining debts. You must pass a means test.
• Chapter 13 lets people with steady income keep property while they follow a court-approved repayment plan, usually three to five years.

Before you file, you must complete credit counseling from a government-approved provider within the six months before your filing, and after you file you take a debtor education course. Neither chapter typically erases child support, alimony, most taxes, fines or most student loans. Bankruptcy can stay on your credit report for 10 years. Talk to a bankruptcy attorney before you choose this route; many offer a free first consultation.

How debt relief affects your taxes

The IRS treats canceled debt as generally taxable income. If a creditor forgives part of what you owe, through settlement or otherwise, it may send you Form 1099-C showing the amount and the date. IRS Topic 431 says you have to report the correct taxable amount even if the form is wrong, so ask the creditor to fix any error.

There are exclusions. Debt canceled in a bankruptcy case is not taxable, and neither is debt canceled while you are insolvent, up to the amount you are insolvent. You claim the exclusion on Form 982. Credit counseling and DMPs don't forgive principal, so they usually create no tax bill. Before you settle a large balance, set aside money for a possible tax bill or talk to a tax professional.

How to spot a debt relief scam

The FTC lists these warning signs. Walk away if a company:

• Charges fees before it settles any debt or enrolls you in a plan
• Guarantees it can settle all your debts or get fast forgiveness
• Talks about a "government" debt relief program for credit cards. There isn't one
• Tells you to stop talking to your creditors without explaining what happens next
• Claims it can stop all collection lawsuits
• Promises to remove accurate negative information from your credit report. Only time removes it: most negative items stay seven years, and bankruptcy 10

Report problems at ReportFraud.ftc.gov, your state attorney general or your local consumer affairs office. If a collector contacts you about a debt you don't recognize, ask for proof in writing first with a debt validation letter.

How to choose the right debt relief option

1. Write down every debt: balance, rate, minimum payment and whether it's secured.
2. Build a bare-bones budget. Work out what you can put toward debt each month after rent, food, utilities and transportation.
3. If that covers the minimums plus extra, use a DIY plan and call your creditors for a lower rate.
4. If it covers the minimums but rates are crushing you, talk to a nonprofit credit counselor about a DMP, or compare consolidation offers.
5. If it can't cover the minimums, get a free counseling session first. Then compare settlement and bankruptcy with real numbers, including fees, taxes and the credit effect.
6. Get everything in writing and keep a copy of each agreement and payment.

Example: the same debt under three options

This is an illustration with made-up numbers, not a quote or a prediction. Your rates, fees and results will differ.

Say you owe $12,000 on credit cards at 24% APR and can pay $400 a month.

• Stay the course at 24%: about 47 months to pay off and roughly $6,500 in interest.
• DMP that cuts the rate to 8%: about 34 months and roughly $1,400 in interest, plus whatever monthly fee the agency charges. That's about $5,000 less in interest in this example, and you repay the full balance.
• Settlement at half the balance: you'd pay $6,000 to creditors plus the company's fee, and the $6,000 forgiven may be taxable income unless an exclusion applies. Meanwhile, months of missed payments damage your credit, and there's no guarantee every creditor settles.

The math shows why counselors usually try a rate cut before settlement: in many cases, cheaper interest gets you out almost as fast without the credit damage or a tax bill. Track the numbers yourself with a debt payoff spreadsheet so you can see the plan working month by month.