January 14, 2024

Debt Relief vs Bankruptcy

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Debt relief can make your debts manageable, while bankruptcy offers a clean slate. Which is the better option? Read on.

Debt relief can reduce your debts, while bankruptcy can eliminate them. However, note that there are negative consequences for both.

That said, both options can relieve you of your financial distress. And the more suitable one will depend on your debt type.

Keep reading to know which is better.

Is Debt Relief Or Bankruptcy Better?

Debt relief can help you decrease your debts so you can afford to pay them off over time. In contrast, bankruptcy can legally discharge you from your debts when you can no longer afford them.

Having said that:

  • Debt relief may be better if you still have enough budget to commit to a program. With a set monthly payment you can afford, you can slowly repay your debts one by one.

  • Bankruptcy may be better if you have exhausted all your options to pay off debts. It may also be suitable if you have eligible assets ready for liquidation.

Many professionals may consider bankruptcy a last resort since it can stay on your credit report for up to 10 years.[1]

Does debt relief count as bankruptcy?
Debt relief and bankruptcy are not the same. Debt relief companies can help you by negotiating with creditors to reduce debts. Bankruptcy is a legal process that discharges some of your qualified debts. It may also involve restructuring for a reasonable repayment plan. Both help make your debts more manageable.

Here's a little more explanation of why debt relief may be better.

Why Choose Debt Relief

Debt relief reduces your debts to a lower amount, which makes them easier to pay off. Depending on the debt relief method, there are a couple of things you can do:

  • Negotiate with creditors to reduce the principal of the debt
  • Reduce high interest rates
  • Waive loan fees
  • Extend payment terms to lower monthly payments
  • Combine the same debts into one monthly payment

Debt relief methods include debt settlement, debt consolidation, and credit counseling. Debt settlement involves debt negotiations to lessen your debt amounts.

Debt consolidation, on the other hand, merges multiple debts into one. Lastly, credit counseling lets you get advice on your debts, credit, and financial management.

Read our guide on debt settlement and debt consolidation to know how both debt relief methods compare.

Given these options, there are reasons why you should or shouldn't go for debt relief.

Debt Relief Pros And Cons


  • Experienced professionals negotiate for you
  • Creditors are willing to negotiate than risk default
  • Personalized programs are fit for your budget
  • Lessens contact with creditors


  • Creditors can file a case against you for your unpaid debts
  • Missed payments instantly impact your credit (and you need to intentionally miss your payments with debt settlement)
  • Does not qualify all types of debts
  • Can get expensive especially with larger debts
  • Creditors are not obligated to settle
  • Forgiven debts may be considered taxable income

How long does debt relief stay on your credit report?
The results of debt relief can last up to 7 years. That's because you need to stop paying your debts every month before signing up for debt relief. And missed payments, late payments, and collection accounts can stay on your credit report for 7 years from the date of delinquency (date of last payment).

If you think debt relief may not suit your needs, then here are some reasons why you can go for bankruptcy.

Why Choose Bankruptcy

Bankruptcy is a legal process that can discharge you from debts. Or it can allow you to reorganize debts into a more manageable repayment plan.

There are 2 types of bankruptcy:

  • Chapter 7 Bankruptcy
    Chapter 7 bankruptcy refers to liquidation bankruptcy. Its purpose is to liquidate your non-exempt assets, which are property that falls outside the necessities of living.

    Non-exempt assets include a second car, vacation home, valuable family heirlooms, and the like. Trustees gather and sell these assets and use the proceeds to pay your creditors.

  • Chapter 13 Bankruptcy
    Chapter 13 bankruptcy is referred to as the wage earner's plan. It's strictly for individuals with regular income who want to restructure their debts into a repayment plan they can afford.

    You are eligible for Chapter 13 if you have less than $2,750,000 in debt. The total includes both secured and unsecured debts upon the date of filing.[2]

It's not unusual for professionals to warn you about the long-term effects of bankruptcy. Bankruptcies are often seen as the last resort if you've tried various types of debt relief.

Bankruptcies can stay on your credit report for a long time. As such, you'll need to repair your credit gradually.

Conversion to another bankruptcy
You can convert your bankruptcy in the event that your financial situation and goals have changed. For example, you can file for conversion from Chapter 13 to Chapter 7 if you can't keep up with your repayment plan.

On the other hand, you can convert Chapter 7 into Chapter 13 if you want to keep your assets. You can also settle debts ineligible to a Chapter 7 bankruptcy in a more manageable repayment plan (Chapter 13).

Scroll down to know the benefits and downsides of bankruptcy.

Bankruptcy Pros and Cons


  • Possibility to discharge most of your qualified debts
  • Consolidate qualified debts into an aggressive repayment plan
  • Invoke automatic stay at which creditors are legally not allowed to contact you[3]
  • Bankruptcies can give you a blank slate for rebuilding credit
  • Bankruptcies have a more predictable outcome in resolving your debts


  • You may lose your assets if they qualify for liquidation
  • Bankruptcy can affect your credit for up to 10 years
  • Your bankruptcy is a public record
  • The court is more in control of your financial affairs
  • You may lose your professional licenses depending on your profession and state
  • Not all debts are qualified for a discharge, so you may still owe some debts unless you settle them

Which bankruptcy forgives all debts?
No bankruptcy can help forgive all your debts, especially if you have ineligible debts for the petition. However, Chapter 7 allows you to discharge most unsecured debts, like medical bills, credit cards, and unsecured loans.

Debt Relief vs. Bankruptcy: Detailed Comparison

Debt relief and bankruptcy differ in fees, potential savings, and covered debts, among others. These can determine which option is more suitable for your needs.

What is your biggest concern when considering debt relief or bankruptcy?


Most debt relief companies charge you a settlement fee for their service. This fee is based on the percentage of your total enrolled debts. For example, reputable companies like National Debt Relief charge 15–25% of your total enrolled debts.[4]

On the other hand, with bankruptcy, you are dealing with filing fees and miscellaneous charges.[5][6] For example, you need to pay $338 for filing a Chapter 7 or $313 for a Chapter 13 bankruptcy.

However, the biggest chunk of your bankruptcy petition is legal fees. Hiring an attorney to assist you can cost more than $1,000, depending on the bankruptcy type and complexity of your case.

Find out how National Debt Relief works to see if you can qualify for their debt relief program.

Potential Savings

Bankruptcy can discharge most debts. This means it's possible to eliminate all your debts if they are eligible for the petition.

On the other hand, debt relief companies can negotiate up to half of your original debt. But considering the fees, you may only be able to save a quarter of your original debt amount.

Covered Debts

Bankruptcy can cover both secured and unsecured debts. It depends on the debt types and chapter of bankruptcy you are filing for. Discharge results also depend on the trustees and the cooperation of your creditors.

On the other hand, debt relief companies accept various types of unsecured debts, like credit card debts, unsecured personal loans, or medical bills. Some debt relief companies also help you with selected student loans.

You typically can't enroll secured debts into a debt relief program. Collateral backs up secured debts, so your lenders still have security from your assets.

Exemptions to debt discharge
Some debts are not eligible for discharge.

  1. Most tax debts
  2. Debts not listed by the debtor in the petition
  3. Child support and alimony
  4. Government fines and penalties
  5. Federal student loans
  6. Compensation owed to crime victims
  7. Court-ordered restitution for victims of personal injury
  8. Debts owed to tax-advantaged retirement plans

The final decision on both your dischargeable and non-dischargeable debts depends on the trustees, your creditors, and your case. There's a chance that non-dischargeable debts can become eligible for discharge unless your creditors specifically request for exemption.[7]

Credit Impact

Both debt relief and bankruptcy can have an immediate negative impact on your credit.

Your credit score will drop when you miss your payments for debt relief. Late payments, missed payments, charge-offs, collections, or judgments can stay on your credit report for up to 7 years.[8]

On the other hand, your credit report also retains your Chapter 7 or Chapter 13 record. All accounts included in the petition will be marked with bankruptcy. And your report will reflect late payments, missed payments, or collections before petition filing.

Chapter 7 remains on your credit report the longest since it can stay on your report for up to a decade.

Is bankruptcy a disadvantage of debt?
Bankruptcy is not a disadvantage of debt. It is a legal way to help you discharge your debts and have a chance to rebuild your finances. Just note that one of its most common effects is a dip in your credit score and becoming more ineligible for loans.


You may get a discharge from your bankruptcy a few months after filing it. The entire process can last 3–6 months for Chapter 7 until liquidation is complete. Chapter 13 can last 3–5 years, depending on how the court structures your repayment plan.

That said, Chapter 7 bankruptcy can be a much quicker process than debt relief. With debt relief, negotiators go back and forth with your creditors for years.

For example, National Debt Relief programs typically last for 24–48 months.[9] But this ultimately depends on your creditors and the number of debts you have.


Debt relief companies don't have credit requirements. However, they typically require a minimum debt amount. They also assess your debt types and often qualify unsecured debts only.

With bankruptcy, each chapter has different eligibility requirements:

  • Chapter 7 Eligibility
    You'll have to take a Means Test to see if you qualify for Chapter 7 bankruptcy.

    If your income is below the median income for your state and household size, you will most likely qualify. If your income is higher, you may need to submit other forms to fully assess if Chapter 7 is right for you.[10]

  • Chapter 13 Eligibility
    Chapter 13 bankruptcy does not have a formal Means Test like Chapter 7. However, your income will be assessed for the development of the repayment plan.

Tax Implications

In debt relief, if your forgiven debt is more than $600 for each enrolled debt, the forgiven portion is taxable.[11] You will owe taxes for that portion, which you must pay for when you file your taxes.

Filing for bankruptcy has no tax implications. Just note that tax debt is not dischargeable in bankruptcy.

Your creditors can take legal action against you when your debt relief company starts negotiating. On the plus side, most debt relief companies have a network of legal professionals in case of lawsuits.

In comparison, bankruptcy is a legal process. It is best if you employ an attorney to assist you. Once you file for bankruptcy, the automatic stay goes into effect. This helps you have legal protection from your creditors while the process is ongoing.

Note that you need to deal with the bankruptcy court and officials overseeing your petition. Your non-exempt assets are legally sold as part of the liquidation process. You also get a court-approved plan to pay off your debts.

Your bankruptcy becomes a public record. Your name and case details are accessible to the public and can appear in court records. Your potential lenders can see this record, which can sway their decision to loan you money.

Can You File For Bankruptcy After Debt Relief?

Yes, you can file for bankruptcy after a debt relief program. This is especially true if you can no longer complete your program.

Once your bankruptcy petition is granted, eligible debts are discharged. Your creditors are legally prohibited from any attempts to collect your debts after your petition is finalized.

Is it better to file bankruptcy or debt relief?
There is no one right way to know if bankruptcy or debt relief is better for you. Bankruptcies may stay on your credit the longest, but your credit score may immediately drop for signing up with debt relief companies. You should assess your complete financial situation before choosing an option.

If neither bankruptcy nor debt relief sounds good to you, consider the alternatives in the next section.

Debt Relief vs Bankruptcy: Alternatives

Here are some other options you can consider:

  • Financial planning
    Overhauling your financial life takes a lot of work. You may need to apply other strategies to tackle your debts.

    For example, consider the debt snowball method, where you tackle your smallest debts first. It can encourage you to keep going when you cross out some loans on your list over time.

  • Selling assets and generating more income
    You may consider selling some assets (if you have any) to pay off your debts. That way, you avoid paying filing fees or committing to a debt relief program you can't complete.

    You may also consider increasing your income. Side hustles may help with that.

  • DIY debt relief
    You can take matters into your own hands and perform debt negotiations yourself. You just need to learn negotiation strategies and know more about your creditors.

Bottom Line

Debt relief can help lessen your debts so you will pay less than you owe. However, your credit may decline due to missed payments, and service fees may be particularly expensive.

On the other hand, bankruptcy can free you from your debt obligations. But it can affect your credit for a long time. Your assets may even be used for liquidation.

Since bankruptcy is more advised as a last resort, you can try enrolling in a debt relief program first. If you still have other debts after the program, you can try qualifying them for bankruptcy.


  1. ^ HelpWithMyBank.gov. How long can a bankruptcy stay on my credit report?, Retrieved 12/12/2023
  2. ^ United States Courts. Chapter 13 - Bankruptcy Basics, Retrieved 10/05/2023
  3. ^ United States Bankruptcy Court. The Automatic Stay (Protection from Creditors), Retrieved 10/04/2023
  4. ^ National Debt Relief. FAQs: What will your service cost me?, Retrieved 12/12/2023
  5. ^ US Bankruptcy Court. Bankruptcy Fee Schedule, Retrieved 10/04/203
  6. ^ US Courts. Bankruptcy Court Miscellaneous Fee Schedule, Retrieved 10/04/2023
  7. ^ US Courts. Discharge in Bankruptcy - Bankruptcy Basics, Retrieved 10/04/2023
  8. ^ CFPB. How long does negative information remain on my credit report?, Retrieved 12/12/2023
  9. ^ National Debt Relief. FAQs: How Long Will It Take To Get Out Of Debt?, Retrieved 12/12/2023
  10. ^ United States Bankruptcy Court. What is the Chapter 7 "Means Test"?, Retrieved 11/10/2023
  11. ^ IRS. About Form 1099-C, Cancellation of Debt, Retrieved 12/12/2023

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