What are the Alternatives to Bankruptcy? Can Debt Settlement Services, Consolidation Loans, or Credit Counseling Help Me?

One of the first questions we ask during our free bankruptcy consultation is: “How much debt do you have, and what kind of debt is it?”

While there’s no minimum amount of debt required, there is a threshold amount below which it doesn’t make sense to file bankruptcy.

Many people we speak to have a a lower amount of debt, or maybe only one or two debts they need to resolve. They might not be ideal candidates for bankruptcy.

Usually they want to know if there is another approach (besides bankruptcy) that might help them.

Specifically, they ask us to compare the effectiveness of the following approaches:

  1. Debt settlement services,
  2. Debt consolidation loans,
  3. Nonprofit credit counseling services, and
  4. Direct negotiation with the creditor.

In this post, I discuss each of these approaches.

Debt Settlement Companies

Let’s start with an easy category.

Debt settlement companies– stay away from them.

Many of my bankruptcy clients call me after working with debt settlement companies for years, only to find their creditors sued them anyway.

Most debt settlement companies work on the following principle: you pay a monthly fee to them. For a large part of your payment plan, those fees are only used to pay the debt settlement company. At some point, your monthly fees start building up a fund that will supposedly be used to pay settlements to your creditors.

Many clients who contact us after working unsuccessfully with debt settlement companies were paying thousands of dollars per month to the debt settlement companies.

And they ended up filing bankruptcy anyway.

The problem is your creditors aren’t required to stick to your debt settlement company’s timeline. Creditors can sue you any time before the statute of limitations has run.

Creditors aren’t required to accept settlement offers either (when the debt settlement company finally gets around to working your file.)

Worst of all, litigation expenses are often NOT included in the services provided under your debt settlement contract.

If a creditor sues you, you are often on your own in dealing with that lawsuit.

There are hundreds of debt settlement companies out there. It’s possible there are some that actually help people– but, I’ve never encountered one.

The concept itself (pay a debt settlement company very high fees for months or years and hope your creditors will wait patiently) doesn’t really allow for good results

Debt Consolidation Loans

Debt consolidation loans can work under very specific circumstances.

If your credit is still good when you start looking for debt relief, you might qualify for a lower interest consolidation loan.

You would then take your 9% consolidation loan and use those funds to pay off your 22.5% interest rate credit cards, for example. (These numbers are just typical examples.)

The problem is most people wait until their credit score is already on the low side before they start exploring debt resolution options. This post explains why a person’s credit score can be low even before they have ever missed a payment.

You need to have a pretty good credit score to be approved for a debt consolidation loan.

The other problem with debt consolidation loans is people often leave the credit cards open after they have paid them down. Unfortunately, sometimes emergencies happen and the cards end up being used / charged up again.

Additionally, some of the debt consolidation loan programs charge high fees. These are separate from the interest rate for the loan itself.

Sometimes the level of debt is just too high to manage, even if the interest rate can be cut a bit.

In these situations, the fresh start of bankruptcy is truly the best option if bankruptcy is otherwise a good fit.

Nonprofit Consumer Credit Counseling

For some people, nonprofit consumer credit counseling can be a good solution if their debts are relatively low and they are dealing with relatively few creditors.

But, you can probably get the same results negotiating directly with your creditors (more on this below.)

A nonprofit consumer credit counseling service will work to lower the interest rate on your unsecured debts.

Most plans will want you to pay back the debt in a relatively short time– two to five years.

While it’s a good idea to pay back debts faster, this can cause your monthly payments to be higher than your original credit card monthly payment.

These services often have prearranged programs with major creditors. For example, if you meet certain income / expense parameters, you will be offered a particular interest rate reduction.

Almost all programs offer consumer education, which can be helpful.

They do, however, charge fees. They charge a monthly fee and a set-up fee.

If you only have a few debts, you might not see much of a savings on your monthly payments by the time you take into account (1) the shorter repayment period and (2) the program’s fees.

At the other extreme, the modest reduction in interest often isn’t enough to help people with high amounts of unsecured debt.

Negotiate Directly with Creditors

As discussed above, consumer credit counseling services can sometimes get you a lower interest rate.

But, you can typically get the same deal by negotiating directly with your creditors. And it won’t include a monthly fee.

Many creditors have pretty tight parameters for qualifying for their internal assistance programs.

For example, they might tell you (strangely enough) that you don’t have “enough income” to qualify for their own internal programs.

Chase Bank is notorious for this. It is a mystery why they would prefer for an account to go into default or bankruptcy than to work with the consumer, but that seems to be their approach.

We negotiate with the same creditors on a daily basis and have extensive experience fitting our clients’ situations into the parameters of the creditors’ internal assistance programs.

If a person has only one or two debts or has very high income and / or non-exempt assets, we will typically recommend this approach as an alternative to bankruptcy.


When it comes to managing debts, you might have a few options.

As described above, your options will depend on your circumstances (credit score, debt level, and number of creditors.)

We can help you with any of the above approaches– except debt settlement services. We don’t recommend them.

This gives our clients the added reassurance that we are giving them frank advice. We don’t have an incentive to push any particular approach.

If we think you can resolve your situation without our help, we will let you know during the free consultation.

Give us a call at (805) 284-0760 to discuss all of your options during our free initial consultation.