What do you do when you're unable to even make the minimum payments on your debt? You do have other options besides bankruptcy. Debt consolidation, debt management, and debt settlement are all viable options depending on your situation.

Is debt overwhelming you?

Paying off debt yourself using a debt snowball or avalanche is always the best option for debt elimination. It will be the cheapest way to get out of debt and it forces you to confront the choices that got you into debt in the first place. This will help you from going back into debt later.

However, if you are feeling like there is no way out, there are some other options that can help.

Debt consolidation

Debt consolidation means taking out a loan to pay off all your other debts.

This can be a good option if your interest rate is lower and your minimum payment is smaller. It might free up some cash flow to start making some actual progress on your financial situation.

The danger of debt consolidation is that it feels like forward motion when it isn’t. You just moved your debts from one place to another. Doing this will probably free up some available credit, and people have been known to consolidate their credit cards in the name of getting a lower interest rate, only to go out and max them out again. So be careful. If the circumstances that got you into debt haven’t changed you might find yourself in a worse spot later on.

Also, do not roll unsecured debt into secured debt. In other words, don’t take out a home equity line of credit to pay off your credit cards. Life happens and if you miss a few credit card payments nothing much happens. Yes, you’ll get a few fees. They might raise your interest rate. You may even get some calls from creditors. But you won’t lose your house! Miss a few payments on your home equity line of credit and you’re looking at foreclosure.

Another common mistake is taking money out of your retirement account to pay off debt, whether taking it as a loan on your 401(k) or withdrawing the money outright. That money is for your future and not meant to pay for your past! The money in your retirement accounts is protected from creditors, so always leave it where it is.

If, despite your debt, you still have good to excellent credit, there are a number of personal loan options that you can use for debt consolidation. These lenders require that you have good credit and steady employment, but they offer large loan amounts of $35,000 or more that can be used for debt consolidation.

Compare our recommended personal loan lenders and learn more about the application requirements here.

Debt management

In debt management (also called credit counseling), you will work with a credit counselor. That person, or team of people, may contact your creditors to negotiate interest rates and other fees. Creditors often have preset arrangements with debt management companies to reduce your interest rate when you enter these programs. They will also try to work out a new minimum payment that takes your whole situation into account.

When you enter a debt management program, each month you will put your monthly payment into an account that the debt management company will use to pay your debts. They do the actual paying of the creditors, you will only make one payment a month into your new account. This helps assure the creditors that they will receive their payments on time.

An example of these programs is Accredited Debt Relief. They partner with Debt Relief companies and act as the negotiators to get you a credit card debt price that is lower than what you currently owe. The average debt settlement program lasts 2-4 years.

Debt management can be good if you are behind on your debts and can’t afford to make the minimum payments. Your credit counselor will be familiar with your entire financial situation so they can help you get back on track. Often times debt management companies have educational resources that help their customers turn their financial lives around on a deeper level than just managing their debts.

There are some downsides to debt management, however. First, they charge a fee for their service — often between $25 and $50 a month. In some cases, the debt management company will save you more than this by negotiating lower APRs and fees with your creditors, but there’s no guarantee.

The other (potentially big) downside to debt management programs is that the program may negatively impact your credit history. In debt management, creditors will usually close your accounts. This is one negative mark on your credit score. The other thing that can happen is the creditors will change the status of your loans from “paid as agreed” to “settled” or some other term. In the credit world, this indicates that the creditor made special arrangements (such as lowering your APR) and that you did not repay the loan as originally agreed.

In the long run, sacrificing a few points on your credit score is a small price to pay for the security you’ll gain by getting out of debt. Still, it’s best to be informed before you proceed with a debt management program.

Debt settlement

Your last option, debt settlement, is an iffy one. In general, we recommend you avoid these companies altogether. If, however, you are months behind on certain bills, you may want to attempt debt settlement yourself by following the same tactics.

In debt settlement, a company negotiates with your creditors to reduce the total balance that is owed. They may ask you to stop making any payments for a few months so that your debts go into default. At this point the creditors are much more willing to make a deal. Instead of making your regular monthly payments to your creditors you will start making payments into an account that the debt settlement company can access. When there is a lump sum in that account that is sufficient to settle a debt the company will call the creditor and negotiate a lump sum payoff that is less than the total balance that is due.

Keep in mind that interest and fees will be accruing on your debt while you are building up that account. Your accounts will likely go into collections. Also, only unsecured loans qualify for debt settlement, so you can’t settle on your mortgage or car loan. Student loans are also out.

There are tax consequences when any principal balance is forgiven on a debt. The amount of debt that is forgiven can count as income for you. So for example, if you have a $10,000 credit card balance that is settled for $6,000, you may have to pay income taxes on the $4,000 that was forgiven. Be sure to speak with an accountant about your specific situation.

The fees charged are generally a portion of the settled balance, often times this runs about 20 percent. Note that the laws changed in 2010 and debt settlement companies are no longer allowed to charge up-front fees.

In order to participate in debt settlement, you may have to have large sums of cash available in order to pay the negotiated among immediately. For this reason, debt settlement isn’t usually a viable option for most people.

The last resort: Bankruptcy

Although we wouldn’t wish it on anyone, bankruptcy is a legal safeguard for individuals who get into debt that they’ll never be able to pay off. Typically, bankruptcy is for situations in which you’ve somehow accumulated debts that are many, many times your annual income — or you’ve lost your income altogether. Read more about when, if ever, you should consider bankruptcy.

Bankruptcy is a court-supervised process that can either a) establish a 5-year repayment plan on your debts that you can afford based on your income or b) if you qualify, eliminate your debts altogether.

Keep in mind, however, that bankruptcy only relieves you from paying unsecured debts like credit cards, personal loans and credit cards. If you have secured debts like a mortgage or car loan, you’ll have to work out a way to keep paying those or risk losing you home or car. Also, student loans are not dischargeable in bankruptcy.

Finally, you will need to hire an attorney to file bankruptcy, and even bankruptcy lawyers don’t work for free.

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About the author

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Ashley Barnett is the Content Director at Money Under 30. She has been creating personal finance content for the internet since 2008 and is committed to high quality content that is as useful to readers as possible. She lives in Phoenix with her family.