Alternatives to Debt Consolidation

If debt consolidation doesn’t seem quite right for your situation, there are several other debt-relief methods. Of course, all of these strategies have their own pros and cons, and only you can decide whether they are better or worse for your unique situation.
Credit Counseling

Counselors working on behalf of reputable nonprofit credit-counseling agencies can help you create a plan to better manage your money and budget for debt payments. Of course, this strategy doesn’t actually reduce your debt, but it also has fewer risks than consolidation or settlement and debt management, discussed below.
Debt Settlement

As I mentioned above, debt consolidation doesn’t reduce your loan principals. Debt settlement does. A debt settlement company negotiates with creditors on your behalf.

When you sign up, you’ll likely begin contributing to a special account set up by your debt settlement company. Once it reaches a certain level, the company will reach out to your creditors in hopes that they’ll accept a lump sum that’s less than what you actually owe. After that sum is paid, you’re no longer indebted to the creditor.

How long it takes largely depends on how quickly you can save enough to begin negotiations, but most companies allow two to four years for the process. Settlement has big risks, though, including big fees, damage to your credit score, and tax liability. Take a look at my separate post on debt settlement companies for more details.

Debt Management

In debt management, a company negotiates with your creditors to lower your interest rates and monthly bills, but the principal remains the same. You’ll pay the debt management company, and it distributes the money to your creditors.

Lower rates can save you a lot of money, and you’ll have an easier time staying organized. But your credit can take a hit from participating in these programs if the company isn’t on the ball with payments, and potential lenders might shy away if they know you’re in a debt management program. You’ll also have to close all of your accounts and agree not to open new ones.

Finally, it can also be tricky to separate legitimately helpful programs from scams and shady fly-by-night companies. Take a look at my separate post on debt management companies for more details.


For most people, bankruptcy is the nuclear option. The negative implications of bankruptcy can certainly be severe, including a massive impact on your credit.

If you’re able to consolidate your debt with a loan that you can comfortably pay off and can avoid acquiring new debt during the process, debt consolidation is a much less drastic option than bankruptcy. That’s because your credit won’t suffer any more of a hit with consolidation when it’s done correctly.

Beware of bankruptcy lawyers who tell you bankruptcy is better than debt consolidation. They have a vested interest in clients using their services, and many also confuse debt consolidation with debt management or settlement, discussed above. These two services can hurt your credit, making bankruptcy a more viable option if you’re considering them.

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