Credit counseling vs. debt forgiveness: Which is better for $10,000 (or more) in debt?

If you owe a significant amount of debt, it can feel tough to get ahead. Inflation is still above its ideal target, taking a bite out of your purchasing power. Interest rates are also still relatively high, adding to the cost of borrowing. For example, credit card interest rates are above 20%. If you're behind on payments, you could be hit with an even higher penalty APR.

Whether you have credit card debt, medical debt, or a mix, it can be overwhelming to manage. You see your balance increase as interest accrues and repayment becomes even more challenging. If you fall behind, it can impact your credit and be costly. 

While this is a situation nobody wants to find themselves in, you're not alone and there are ways out — for example, credit counseling and debt forgiveness. These options can provide financial debt relief but are very different in how they work. We spoke to experts on how to get debt help if you have large debts of $10,000 or more. 

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Credit counseling vs. debt forgiveness: Which is better for $10,000 (or more) in debt?

Not sure which of these options is preferable for your five-figure debt amount? Here's what to consider:

Credit counseling 

Nonprofit credit counseling agencies help you build a budget or put you on a debt management plan (DMP). You may get an initial session at no cost. "Between 70% and 80% of the people who reach out to us only need to make some adjustments to their budget. They don't need a debt management plan," says Martin Lynch, president of the Financial Counseling Association of America.

If you owe $10,000 or more to creditors, a debt management plan can help you create a plan to pay off debt. Using a debt management plan, credit counseling agencies work with creditors to lower your interest rates and monthly payments. You send the agency a lump sum payment, which then gets sent to your creditors. 

"What consumers need to understand is that all major creditors will give them a break if they go through counseling. They close the accounts. The trade-off is that the interest rates will be reduced to an average of 7% or 8%," says Lynch. "Most creditors will also waive the over-limit fees and the past-due fees as well because you're going through counseling."

It can take three to five years to complete a debt management plan, though Lynch notes that it can take an average of 40 to 41 months to pay off debt. On a debt management plan, you typically pay a relatively small set-up fee and monthly payment. Given the lower rates and streamlined repayment, you can still come out ahead. 

Learn more about your credit counseling options here.

Debt forgiveness

Credit counseling is one option for debt relief, but at the end of the day, you're still paying off your debt. Typically, just on more favorable terms. If your balances exceed $10,000 or are significantly higher, another option to consider is debt forgiveness, also known as debt settlement. You may be able to lower the amount you owe or discharge some of your debt through debt settlement and bankruptcy. These options can be a lifeline but can also have serious implications on your credit and finances. 

Debt settlement

For-profit debt settlement companies can represent you with your creditors to settle the debt and, essentially, pay less than you owe. Typically, you stop making payments on the debts you owe while the company negotiates on your behalf. During this time, your balance can grow thanks to interest and fees. Because you're not making payments, there is typically a negative impact on your credit score. Lynch states that debt settlement is best for borrowers with money available to propose a settlement. 

"The problem with settlement is that most people don't have that money and it may take them a year to put together the money they need for the settlement company to reach out to their creditors," says Lynch. "In the meantime, they can be sued. That's not something anybody wants, but because there is no agreement between the settlement company and the creditor, lawsuits happen."

The ideal candidate for debt settlement is someone who has a willingness to resolve their debt and has a budget, according to Leslie H. Tayne, Esq, a financial attorney and a consumer debt expert at Tayne Law Group, which focuses on debt settlement. "You still need to be able to have funds available to negotiate and pay the creditor," says Tayne.

That said, it's important to know that debt settlement appears on your credit report for seven years. Though the process can have short and long-term credit implications, Tayne says your credit score can bounce back. 

"Initially, it looks bad because you're behind and you're settling the debt for less than what's owed. However, you are settling the debt and the debt balances go to zero very quickly. When they go to zero by paying them off through debt settlement, your credit score actually comes back," says Tayne. 

Debt settlement can provide debt relief in a quicker fashion. But again, it's ideal for borrowers who have some room in their budget to settle. Additionally, borrowers need to be aware that they may be taxed on the forgiven amount. Make sure to vet any debt relief companies and beware of potential scams. 

Bankruptcy 

Tayne says she will recommend bankruptcy for consumers with cases that aren't a good fit for debt settlement or debt consolidation. Through bankruptcy, you may be able to legally discharge your debt. 

"The first thing I do is find out why they're in that situation. The second thing I do is immediately explain what the light at the end of the tunnel is," says David J. Harris, a bankruptcy attorney. 

While several different types of bankruptcy exist, Chapter 7 bankruptcy is available if you're struggling to make payments and stay current on your existing debt. 

"In the average straightforward chapter 7 personal bankruptcy case, it's around the 5 to 6-month period from the date the case is filed until the date a discharge order is entered. If there are things that go on in the case, such as a creditor filing a dischargeability complaint that can stretch it out," says Harris. 

Though bankruptcy can be a great help, it's not free. For Chapter 7 bankruptcy, you must pay a filing fee of $338 and potential attorney fees, which could be several thousand dollars. Lynch says working with a professional is worth the cost. 

The bottom line 

If you're looking into debt assistance options, credit counseling, debt settlement and bankruptcy can give you a path forward. Given their major differences, deciding which is the right fit depends on your unique set of circumstances. 

"It's really about talking to the client, finding out their goals and objectives, who their creditors are, what their timing is, what their budget looks like, and how they see their financial future," says Tayne. Consider the impact on your credit score, budget and the overall benefits and drawbacks. It's also important to be aware of potential scams or bad actors that don't have your best interests at heart. 

"Whenever a consumer hears or is talking to a debt settlement company that makes guarantees or promises, unfortunately, that's probably a red flag for a scam because there is no way to determine what the creditors are willing to do," says Tayne.

Harris recommends that consumers do their own research and look at all of their options. You can consider a debt consolidation personal loan first, but if that's not feasible, these debt relief options can help. Once you find what works well for your situation, you'll have a plan to get out of debt and support along the way.