What are the alternatives to debt consolidation?

Researching your options is always a good idea, and it’s especially important when you’re making serious money decisions. Recognizing when a popular solution isn't your solution shows financial wisdom.

Your path to financial freedom doesn't have to follow someone else's blueprint. The right debt strategy for you is the one that aligns with your specific circumstances, your comfort level, and your long-term goals. What works brilliantly for your neighbor might not be the right move for you, and that's perfectly fine. There are other proven approaches that could help you regain control of your finances.

Let’s compare debt consolidation with its alternatives.

When is debt consolidation not the right fit?

There are plenty of valid reasons why debt consolidation might not be the best way to go. You might look for debt consolidation alternatives if you:

• Are denied for a debt consolidation loan because of a low credit score or a thin credit history

• Crunch the numbers and find that the payments for a debt consolidation loan don't align with your budget

• Are behind on debt payments, or your accounts are already in collections

• Prefer debt relief options that don't require you to borrow more money

• Consolidated debts in the past but ended up with new debt to repay

If debt consolidation isn't right for you, it just isn't right for you. You don't have to feel bad about that. In fact, you should feel empowered that you're taking a thoughtful approach to find a way out of your debt situation. 

What are the alternatives to debt consolidation?

Common alternatives to debt consolidation include

• Debt management plans (DMPs)

• Debt settlement

• Bankruptcy

• A DIY debt payoff strategy, like the snowball method or debt avalanche

Each debt consolidation alternative works differently, but they have one thing in common: None of them require you to take on new debt to pay off what you already owe. 

That's huge if you don't want to add to your balances. Are some alternatives to debt consolidation better than others? Not necessarily. It all comes down to your goals and how quickly you'd like to get rid of your debt. 

Option 1: Credit counseling and debt management plans (DMPs)

What is a debt management plan? In simple terms, it's a structured plan to repay debt. Here's how it works:

• You talk to a credit counselor about your debt situation and how much you owe. 

• Your credit counselor works with your creditors to enroll your eligible debts in the plan. They may also negotiate to lower your interest rate or get certain fees waived. 

• You make one monthly payment to the credit counselor, based on what you can afford.

• The credit counselor splits the payment among your creditors. 

• You make all the payments required by the plan until your debts are gone. 

Credit counselors may charge a set-up fee to enroll you in the plan. There may also be a small monthly fee. 

What's the difference between credit counseling vs. consolidation? They sound similar, since you only make one monthly payment but consolidation. However, only consolidation requires you to get a loan to combine your debts. 

DMP pros:

• Only one payment to make each month

• Interest rate may be reduced, or fees waived

• Professional help and support as you pay off debts

DMP cons:

• Doesn't reduce your total debt

• Requires commitment to make the plan work

• Creditors may close your accounts when you enroll

Can I qualify for a DMP if I'm behind on payments?

You could still qualify for a debt management plan if you're behind on payments. Many reputable credit counseling agencies work with clients who are already struggling financially. 

If you're behind on payments, however, you may find the next debt consolidation alternative is a better choice. 

Option 2: Debt settlement

Debt settlement or debt relief is a more aggressive approach that allows you to legally pay less than what you owe. 

Essentially, you ask your creditors to take less than the full balance due and cancel the rest of the debt. For example, if you owe $5,000 on a credit card, you might ask your creditor to accept $3,500 instead. If they agree, you make the payment and the other $1,500 in debt is forgiven. 

You can negotiate your own debts. Or you can get help from a professional debt resolution company. Debt settlement companies typically charge fees. A legitimate company won't ask you to pay anything upfront. You only pay after debts are successfully negotiated. It may be worth having a debt expert on your side to handle negotiations if you want to get the most favorable settlement possible. 

Debt settlement pros:

• Could significantly reduce your debt 

• Could help you get rid of debt faster than by making minimum payments

• You could avoid bankruptcy

Debt settlement cons:

• Debt settlement typically has a negative impact on your credit scores

• Creditors don't have to agree, and you could still be sued for unpaid debt

• Forgiven debt may be taxable

When is debt settlement better than consolidation?

The main difference between debt settlement vs. debt consolidation is that one leaves you with less to repay, while the other doesn't. Your total debt reduction hinges on several factors, including:

• How much you owe

• How old the debt is

• Your payment history

• Whether you negotiate yourself or hire a debt specialist

Debt settlement could bring you significant financial relief. Debt consolidation, on the other hand, is meant to make debt easier to manage. It could make more sense to settle debts if you're behind on payments or you owe a large amount that you can't afford to repay in full. 

Option 3: Bankruptcy

Bankruptcy is a legal way to get relief from debts. How does bankruptcy work? In a nutshell, Chapter 7 bankruptcy allows you to eliminate certain debts altogether, while Chapter 13 gives you three to five years to repay what you owe. 

Many people view bankruptcy as a last resort, but in some cases, it's the best way to deal with debt. You'll need to be eligible to file for bankruptcy. If you qualify, you could get a much-needed financial reset. 

Pros:

• Bankruptcy stops collection actions, including debt lawsuits

• Chapter 7 bankruptcy could wipe out your unsecured debt

• A wide range of debts can be discharged in bankruptcy

Cons:

• Not everyone qualifies for bankruptcy

• Certain debts can't be wiped away

• Bankruptcy typically causes significant credit score damage

For personalized legal advice, consult with a qualified attorney licensed to practice law in your state. 

Should I file for Chapter 7 or Chapter 13 bankruptcy?

If you're debating bankruptcy vs. consolidation, first consider which type of bankruptcy you might qualify for.  

Most people want the kind of bankruptcy that wipes out your debt. Chapter 7 can eliminate certain debts altogether. The tradeoff is that you might have to give up some of the things you own. The court will sell them and give the money to your creditors. 

Chapter 7 could be a good option if you mostly owe unsecured debts, like credit cards or medical bills, and you don’t own much or anything that the court would force you to give up. You'll need to pass what's called a means test to qualify. That’s just a look at how much income you have. If you can afford a monthly payment, you won’t qualify for Chapter 7.

With Chapter 13, you’ll pay all of your disposable income to the court every month for three or five years, depending on your income. You'll need to submit a payment plan to the court and get it approved. If you can't keep up with your payments, your case could be dismissed (terminated with no debt cancelation). That could open you up to collection actions again. 

If you’re considering bankruptcy, it’s a good idea to talk to a bankruptcy attorney. 

Option 4: Do-it-yourself payoff strategies

You might decide that none of the debt consolidation alternatives shared here are right for you and that you want to stick with a DIY debt payoff strategy instead. That could work if you've got a steady income and you're committed to sticking with your chosen plan. 

Here are some of the possibilities you might consider. 

• Debt snowball. The debt snowball method has you rank your debts from lowest balance to highest. Make the minimum payments on all of them, and pay as much extra as you can to the smallest debt each month. Once you pay off the smallest debt, you roll its payment over to the next debt and just repeat that process until you zero out all the balances. The snowball method gets you to your first debt payoff fastest.

• Debt avalanche. The debt avalanche works like the snowball method, but you pay off debts from the highest interest rate to the lowest. The avalanche helps you pay off your most expensive debts first to save on interest. 

• Cut expenses. If you want to find more money to pay toward debt, review your budget (or make one if you don’t have one yet). You look at where your money goes to find expenses you could reduce or eliminate, then funnel that extra cash to your debt. Every dollar matters.

• Boost income. Maybe you've cut your budget to the bone and still want to find extra money for debt repayment. You could brainstorm ideas to make more money, whether it's starting a side hustle, taking on more hours at work, selling things around the house, or getting a second job. 

Biweekly payments could help you make headway, since paying every other week adds up to one full extra payment each year. If you get any unexpected money from a tax refund, work bonus, or birthday gift, throw it at your debt instead of spending it. 

Can I pay off $20,000+ in debt on my own?

It's possible to pay off $20,000 or more in debt without any help, but you'll need a realistic plan. Unless you get a huge windfall, you might need several years to pay off that much debt. 

Here's how to come up with a realistic timeline. 

• Go over your budget to figure out how much you can afford to pay toward debt each month. 

• Plug that amount, along with other details of your debt, into a debt payoff calculator. 

• Compare the number of payments you'll make with the number of payments that would be required with a debt management plan, consolidation loan, or debt settlement. 

Talking to a credit counselor or Debt Consultant could give you some perspective on what's doable. 

How to choose the right alternative

Now that you've seen all the alternatives to debt consolidation, it's time to decide which one might be right for you. Here are some questions to help guide your choice. 

• Are you current on debt payments, or have you fallen behind?

• How much debt do you have to repay? 

• Is your debt mostly unsecured, like credit cards or medical bills, or do you owe money on a mortgage or car loan?

• Can you afford to make regular monthly payments toward your debt? 

• Are you okay with your credit score losing points while you work on getting out of debt? 

• Would you like protection from creditor lawsuits? 

These questions can help you narrow down which debt consolidation alternatives may or may not be worth exploring further. If you're still not sure, you don't have to figure it out alone. 

Take a look at our helpful guide to debt solutions, or schedule a chat with an Achieve debt expert. We're here to answer your questions and guide you toward financial freedom.