When you’re struggling each month to make payments, debt relief might be your only option. However, you might have heard myths that debt relief will worsen your situation and ruin your credit forever. That’s why you need to understand how each form of debt relief impacts your credit before you make the most informed decision.

What is Debt Relief?

Debt relief is not one way to settle your debt but rather an overarching term referring to several ways you can erase your outstanding balance. You might be eligible for the following forms of debt relief:

  • Debt Settlement
  • Debt Management
  • Debt Consolidation
  • Bankruptcy

Each form of debt relief affects your credit score differently. Your choice depends on your financial situation and whether you can make consistent payments.

How Does Debt Relief Impact Your Credit?

Here’s how each type of debt relief impacts your credit:

Debt Settlement

Debt settlement allows you to negotiate with creditors to lower your outstanding balance so you can make a one-time lump sum payment. Creditors may offer to settle your debt so they can at least recover a portion of what they lost.

While this form of debt relief silences creditors, it leaves a mark on your credit since you could not fully pay your debt. In fact, debt settlement could impact your credit for up to seven years.

Debt Management

Debt management involves a credit counseling agency that examines your debts and develops a repayment plan. Sometimes, these repayment plans allow you to pay your debt directly to the debt management company at a lower interest rate. Since debt management still requires you to make consistent payments, you must ensure you have a steady income.

This debt relief option shouldn’t impact your credit much if you make the debt management payments. Since payment history greatly influences your credit score, consistent payments through a debt management plan could actually help improve your score over time.

Debt Consolidation

Debt consolidation involves taking out a single loan to pay off all your other debts. This debt relief method allows you to make fixed payments each month and helps to simplify the payment process. However, debt consolidation could negatively impact your credit temporarily.

For example, opening a new credit account, such as a consolidation loan, will impact your credit. Additionally, creditors will review your payment history anytime you apply for a loan. This examination shows up as a hard inquiry on your credit report, negatively affecting your credit score.


There are different types of bankruptcy, but they all have the same goal—eliminating all of your negative debt. Chapter 7 bankruptcy liquidates all your non-exempt assets to repay creditors.

Chapter 13 bankruptcy avoids liquidating your assets by setting up a repayment plan. Chapter 11 bankruptcy, a lesser-used version, is common for small business owners who want to pay off debts without losing control of their company.

Since payment history accounts for 35% of your FICO score, bankruptcy can heavily impact your credit because you essentially say that you will no longer make the payments you promised.

How bankruptcy affects your credit is explicitly relative to your credit score when you filed and the amount of discharged debt. Generally, Chapter 7 bankruptcy will remain on your credit report for ten years, while Chapter 13 remains for seven.

Beware of Debt Relief Scams & Myths

Despite what many believe, debt relief does not permanently damage your credit. You can buy a house, a car, and obtain loans again in the future if you maintain a consistent payment history. While researching the form of debt relief that best suits you, you might come across several scams promising to reduce or completely wipe away your debt. Hefty up-front fees, unsolicited offers, and promises that seem too good to be true are all signs of a debt relief scam.

Contact Eraser Law

We’re here to help by providing trusted support in your time of need.

Free Consult