I used to have an interactive calculator to compare debt options, but sadly the upkeep on that calculator became unmanageable to produce accurate results.
The debt relief landscape is a shifting pile of sand.
However, the chart below clarifies the reality of different options. For example, you will notice bankruptcy gives you the fastest way to get out of debt, and credit counseling is not practical for quick results or boosts retirement savings fast.
The images used in the graphic are:
RED – Nope
YELLOW – Meh
GREEN – Good
If you have any specific questions about how any of these options will impact you, you can always have a chat with Damon Day or search the site for more information like this and this.
Your Best Options for Getting Out of Debt: What Works and What Hurts?
Debt relief isn’t one-size-fits-all. Some options improve your credit, some stop collections, some offer fast relief, and some can drain your retirement savings without you realizing it. Let’s break down the pros, cons, and hidden risks of each approach.
1. Debt Snowball or Debt Avalanche: Paying It Off on Your Own
✔ Improves Credit: Yes, as balances decrease.
✔ Stops Collections: No, unless you pay off delinquent debts quickly.
✖ Quick Results: No, unless you have extra cash to throw at it.
❌ Impact on Retirement Savings: Yes! Redirecting money toward debt repayment instead of investing in retirement can cost you compound growth, employer matching, and decades of potential investment gains. This could cost you hundreds of thousands of dollars in retirement savings.
💡 Best for: People with steady income who want to eliminate debt on their own—but need to balance it with retirement contributions to avoid losing long-term wealth.
2. Debt Consolidation Loan
✔ Improves Credit: Yes, if payments are made on time.
✔ Stops Collections: Only if the loan pays off all delinquent accounts.
❌ Quick Results: No! While it lowers your interest rate, it also resets your repayment timeline, meaning you start over and may stay in debt longer than if you had tackled it aggressively.
✖ Impact on Retirement Savings: None, unless you take out a 401(k) loan (which is usually a bad idea).
💡 Best for: Those with good credit who qualify for low-interest loans to combine multiple debts—but should be aware that this extends their repayment timeline instead of accelerating debt freedom.
3. Credit Counseling & Debt Management Plans (DMPs)
✔ Improves Credit: Possibly, if payments are made consistently.
✔ Stops Collections: Yes, once payments begin.
✔ Quick Results: Moderate—takes 3-5 years to complete.
❌ Impact on Retirement Savings: Yes! A DMP locks up your cash flow in fixed monthly payments for years, taking away money that could have been invested instead. Over time, this could mean hundreds of thousands of dollars in lost retirement growth. More details here.
💡 Best for: People with high-interest credit card debt who want lower interest rates—but need to understand the long-term cost of lost retirement investments.
4. Debt Settlement (Negotiating to Pay Less Than You Owe)
✖ Improves Credit: No—if done wrong, it can severely damage your score. Many debt settlement companies tell clients to stop paying creditors, leading to collections, lawsuits, and years of credit damage.
✔ Stops Collections: Eventually, but not right away. Collections may continue for months or even years while settlements are negotiated.
✖ Quick Results: No—unless you already have the money saved. If you’re building up savings for a lump-sum settlement, it can take years, all while accounts remain in collections.
❌ Impact on Retirement Savings: Yes! If you’re diverting money into a settlement fund instead of investing in retirement, you’re losing out on employer matching, compound growth, and long-term wealth. This could cost you more than the debt itself.
💡 Best for: People who already have money saved to settle debts immediately. If you don’t have the funds ready, be very cautious—this process can take years and hurt your financial future if done wrong.
🚨 Warning: Avoid debt settlement companies that promise guaranteed results or tell you to stop paying creditors without a solid plan.
5. Bankruptcy (Chapter 7 or Chapter 13)
✔ Improves Credit: Yes! Many people think bankruptcy destroys credit, but it actually allows you to rebuild faster than dragging out debt for years. Studies show that those who file bankruptcy often have higher credit scores sooner than those who try to repay through long-term debt settlement or consolidation. More on that here.
✔ Stops Collections: Yes—immediately upon filing.
✔ Quick Results: Yes—Chapter 7 wipes out debt in months, while Chapter 13 restructures it over 3-5 years.
✔ Impact on Retirement Savings: None! Retirement accounts are protected in bankruptcy, meaning you can eliminate debt without touching your 401(k) or IRA.
💡 Best for: People who can’t afford repayment and need a fresh start while keeping their retirement savings intact.
Why Bankruptcy May Be the Fastest Path to Credit Recovery
Many people spend years struggling with debt, trying to avoid bankruptcy—but end up in a worse position. By the time they realize they can’t escape the debt cycle, they’ve lost years of financial progress. Those who file bankruptcy, on the other hand, eliminate debt quickly and can start rebuilding their credit within months instead of dragging out financial hardship for years.
🚨 Biggest Takeaway: If you’re drowning in debt, bankruptcy may actually be the fastest way to recover financially—especially when compared to long repayment plans that keep you stuck for years.
Which Option is Right for You?
- If you have decent credit and can afford payments: Debt consolidation or a DMP may work—but beware of the long-term cost to retirement.
- If you’re in collections but can afford partial payments: Debt settlement might be a good option—but only if you have money saved to settle quickly.
- If you’re overwhelmed and need legal protection: Bankruptcy could be the fastest way to recover.
🚨 Biggest Takeaway: Don’t ignore the impact on retirement. Any debt plan that diverts money from investments or employer-matched retirement contributions can cost you more than the debt itself in the long run. Before committing to any debt strategy, make sure you’re not trading short-term relief for a lifetime of lost financial security.
Need expert advice? Get real guidance before making a decision!