Key Takeaways

If you are struggling with your debt management to keep up with payments, bankruptcy and debt relief both offer you guided programs to pay off your debts. Bankruptcy is a legal procedure where you work with a trustee to pay back some of your debts or discharge them. Debt relief offers various programs to pay off your debts without filing for bankruptcy. Either of these options may be right for you, but it’s important to understand the key differences between bankruptcy vs. debt relief.

What is Bankruptcy?

Bankruptcy is a legal process that allows you to work with a trustee to discharge or restructure your debts. For individuals, the two main bankruptcy options are Chapter 7 and Chapter 13. Chapter 13 restructures your debt, so you’ll need to pay some of your debts. Once the repayment plan is complete, the court will discharge any remaining debts.

With Chapter 7 bankruptcy, your can discharge your debts quickly, but you’ll need to liquidate any non-exempt property you have to pay off your debts.

What is Debt Relief?

Debt relief is an umbrella term that includes multiple methods of resolving debt. Some examples of debt relief include debt settlement, debt consolidation, credit counseling, and debt management programs.

Depending on the nature of your debt, one of these programs will likely work for you. 

Differences Between Bankruptcy and Debt Relief

When comparing bankruptcy vs. debt relief, it’s important to understand how each of these options work, how they impact your credit score, eligibility requirements, and the costs involved.

Impact on Credit Score

Debt relief may have a negative impact on your credit score, depending on the option you choose and what your credit score was to start with. For example, if you have a considerable amount of debt, have maxed out your credit cards, have late payments, or missed payments, your credit scores may already be low. If you opt for a debt settlement program, the impact on your credit may not be as large.

Credit counseling and debt management plans typically have minimal or no impact on your credit. Additionally, it’s important to remember that your credit scores may improve with time if you make timely payments each month and reduce your debt load.

When it comes to bankruptcy, your credit score will take a big hit regardless of the type of bankruptcy you choose. Chapter 7 bankruptcy will stay on your credit report for ten years, while Chapter 13 will stay for seven years.

Eligibility Requirements

Another important consideration is whether you can meet the eligibility requirements for bankruptcy or the debt relief option you choose.

Depending on the type of bankruptcy you choose to file for, you’ll have to satisfy the eligibility requirements listed below:

  • You’ll need to pass a means test to demonstrate that your income is not high enough to make partial payments to your lenders.
  • You’ll need to attend credit counseling sessions before you can file for bankruptcy.
  • You shouldn’t have filed for Chapter 13 bankruptcy in the last six years.
  • You shouldn’t have filed for Chapter 7 bankruptcy in the last eight years.
  • You should’ve filed your tax returns for the last four years.

The eligibility requirements for debt relief vary based on the program. For example, debt consolidation requires you to apply for a new loan or credit card. You’ll need a good credit score to be eligible for a lower interest rate. Anyone can be eligible for credit counseling. For debt settlement plans, you’ll typically need to have unsecured debt of over $10k, and you must have the ability to put aside money each month to use as a lump sum payment.

Cost and Fees

With debt relief, you’ll have to compare the costs and fees associated with each program. For example, debt settlement companies typically charge up to 25% of the total debt enrolled as fees. The settlement company can only charge this fee after settling your account. Additionally, you’ll need to pay taxes on any amount that your lender forgives as a part of the settlement.

Credit counseling services offered by nonprofit organizations are typically very affordable. If you enroll in a debt management program, you’ll need to pay a one-time setup fee and an ongoing monthly charge. A credit counseling agency's limit on fees can vary by state. Typically, fees for DMP are under $79 nationwide. Counseling and education fees are close to $50.

Bankruptcy can be more expensive because it also involves attorney fees. Depending on the complexity of your case, these fees may range from $750 to $4,500. Attorney fees are typically higher when you file for Chapter 7.

Additionally, you’ll need to pay a petition fee of $313 if you’re filing for Chapter 13 and $338 for Chapter 7. You’ll also need to attend mandatory credit counseling sessions, which are more affordable at $10 to $50.

Timeframe for Completion

Usually, Chapter 7 bankruptcy is much faster than Chapter 13. Typically, it takes four to six months for Chapter 7 to be complete from the date you file the case in court. Chapter 13 involves debt reorganization, and it usually takes anywhere from 36 months to 60 months.  

When it comes to debt relief, the timeframe depends on the method of relief you choose. For example, debt settlement may take two to three years, depending on how long it takes you to save for the lump sum settlement amount. For debt consolidation, it may only take you up to a week to get approved for a consolidation loan or credit card. But it may take you a few years to pay off your new loan.

Benefits and Drawbacks of Bankruptcy

Bankruptcy is a last resort option for resolving your debt, and it comes with serious consequences. That said, it might be the right option for you depending on your circumstances. Compare the pros and cons of bankruptcy vs consolidation and other debt relief options before you move forward.


  • Bankruptcy can wipe off most of your debts, including credit card debts, personal loans, and other unsecured debts.
  • You’ll be able to get a fresh, clean break from your debts.
  • When you file for bankruptcy, your lenders will need to stop all debt collection efforts, such as collection calls, foreclosures, and wage garnishments.
  • Any debt that the court forgives during bankruptcy is not taxable.
  • It doesn’t take too long to complete bankruptcy. For example, Chapter 7 cases are usually closed in as little as six months from the date you file.


  • Bankruptcy may only discharge some of your debts. You’ll still need to clear student loans, child support, alimony, medical bills, and tax debt.
  • Depending on the type of bankruptcy you choose, it may stay on your credit report for as long as ten years.
  • Lenders may be unwilling to work with you again until the bankruptcy is no longer reflected on your credit report.
  • Your property may be liquidated to pay off your lenders.
  • If you are filing for Chapter 13 bankruptcy, you’ll need to adhere to the payment plan for up to five years.
  • You’ll need to pass the means test to be eligible.
  • Attorney fees for filing bankruptcy can be substantial.  

Benefits and Drawbacks of Debt Relief

Like bankruptcy, debt relief has its own pros and cons. Explore the reasons why this may or may not be the right choice for you.


  • Unlike bankruptcy, debt relief is private. Nobody else will have access to information about your debt problems.
  • The impact on your credit score may not be as severe as bankruptcy.
  • With many debt relief options, you may be able to save a considerable amount of money on interest charges, fees, and penalties.
  • Your assets may not be at risk unless the lender sues you, and the court orders otherwise.


  • Debt collectors may choose not to accept settlement offers or negotiate with you.
  • Some lenders may choose to take legal action.
  • You’ll still need to make monthly payments in most cases.
  • You’ll need a good credit score for some programs, for example, when you apply for a debt consolidation loan.
  • Even when enrolled in a debt relief program, you may receive collection calls and letters.
  • Any amount that a lender forgives will be taxable income. You’ll owe taxes to the IRS for that.

Choosing Between Bankruptcy and Debt Relief

When choosing between bankruptcy vs. debt relief, it’s important to take a look at your entire financial picture before you make a decision. Unless you are facing extreme financial hardship, it may not be necessary to file for bankruptcy.

Factors to Consider

Here are a few important factors to think about when weighing your options:

  • Consider how much unsecured debt you have. The amount of debt you have relative to your assets will help you decide which option is right for you.
  • Think about whether privacy is important to you. Bankruptcy is a public record, while debt relief isn’t.
  • If you think bankruptcy, court proceedings, and filing requirements are stressful, you may want to explore other alternatives first.
  • Consider the impact bankruptcy may have on your employment.
  • Determine the tax bracket you fall into. Unless you are insolvent, you’ll need to pay taxes on any debt that a lender forgives through debt settlement.

Legal Assistance

Regardless of whether you opt for bankruptcy or debt relief, it’s important to seek professional help to ensure the process goes smoothly and is stress-free for you. Bankruptcy, especially, is a complex process, and you need a competent bankruptcy lawyer to help you navigate the process.

When it comes to debt relief, it may be possible for you to go the DIY route with some options, such as debt consolidation. But if you’re planning to settle your debts, it’s best to work with a debt relief company because they can negotiate better settlement amounts and may help you save a considerable amount of money.

Professional and legal services are easily available for bankruptcy as well as debt relief. Contact the right professional at the earliest opportunity to seek advice on the best way to move forward.

Bankruptcy Attorneys

If you plan to file for bankruptcy, your best bet is to hire a qualified bankruptcy attorney. An attorney can explain bankruptcy laws and exemptions and provide you with honest advice based on your financial situation.

Although legal advice is not cheap, a good lawyer can ensure that your debts are discharged by the court faster. They can take care of the paperwork and ensure that the entire process from start to finish is as stress-free for you as possible.  

Debt Relief Companies

When seeking debt relief, work with a reputable debt relief company that can provide you with reliable support and advice. Although you can do it yourself, it’s best to work with a company that can act as your advocate and provide you with guidance that will be in your best interest.

When deciding which company to work with, check the company's reviews thoroughly on Better Business Bureau and third-party review sites like Trustpilot. Do not hesitate to ask questions about their process, service, and fees. Reliable companies will be honest and transparent about their fee structure and will not hesitate to answer your questions.

In most cases, it’s best to consider debt relief before bankruptcy. A debt consolidation program or debt settlement may help you avoid bankruptcy by providing you with the breathing room you need to pay off your debts. But, in extreme cases, bankruptcy is a viable option.

If you need help figuring out the right option for you, TurboDebt can help. Contact us for a free consultation to see what debt relief option suits you best. Our team will offer you a personalized debt relief option based on your individual needs.