Retiring Soon, But Have Debt? 3 Options to Consider First

If you’re approaching retirement and worried about debt, you’re not alone: According to Allianz Life’s 2024 Annual Retirement Study, 40% of Americans are worried about their debt impacting their future quality of life. Like many people, you might wonder if it makes sense to seek debt relief before retirement. 

On one hand, being unburdened by debt can be freeing. But on the other, some debt relief options can harm your credit and affect your ability to qualify for future financing. A free counseling session with a credit counseling service is an excellent first step to give you a thorough understanding of your financial situation and your options.

Does It Make Sense to Get Debt Relief Before Retiring?

Entering retirement without debt is ideal, but it may not be possible for many people. Whether you should pursue debt relief (and the type of debt relief to pursue) depends on your situation and the type of debt you have. 

In general, it makes sense to prioritize paying off high-interest debt like credit card balances before retirement. This type of debt can grow quickly due to hefty interest charges, making it harder to manage. Ever-increasing balances can erode your retirement savings and lessen your quality of life. So, if you have significant credit card debt or other high-interest debt, it’s worth looking into debt relief—especially because you can get help and learn about options completely for free.

Common Debt Relief Options

Common debt relief options include credit counseling, debt settlement, and bankruptcy. Bankruptcy is usually reserved for those in dire financial circumstances, although it may be preferable to debt settlement, which has high fees. Here’s how each type of debt relief works: 

• Credit counseling: Credit counseling agencies are usually nonprofits that provide help managing and repaying your debt. They offer free consultations and other free services, along with debt management plans, which can help you pay off your debt at a lower interest rate. This option is relatively good for your credit, but you’ll have to pay off your full debt.
• Debt settlement: Debt settlement occurs when a creditor forgives all or a portion of your debt, sometimes in return for a lump sum or payment plan. You can seek debt settlement on your own or by hiring a company; debt settlement companies negotiate with creditors on your behalf and charge high fees if they’re able to help reduce your debt. This option is relatively bad for your credit, but you won’t have to pay the full debt.
• Bankruptcy: Bankruptcy involves working with the legal system to discharge your debt or liquidate your assets to repay it. This option is also relatively bad for your credit, but you won’t have to pay the full debt.

Consequences of Debt Relief

While all the options above could help lift your debt burden, each has positive and negative aspects.

That said, working with a credit counselor generally has fewer consequences compared to debt settlement or bankruptcy, although it will require you to pay back the full debt over time. Here’s a look at the potential consequences of each option:

Credit Counseling

Pros

• Free initial consultation to figure out your debt situation
• Fees apply for certain services, although others are always free
• Fees are on a sliding scale based on financial hardship; services may be free if you qualify
• Debt management plans may result in lower interest rates, reducing the overall amount you’ll have to pay back
• Credit counseling services and debt management plans do not impact your credit score

Cons

• Must pay back full amount of debt
• Can take years to resolve debt
• May require closing your credit card accounts

Debt Settlement

Pros

• Potential for full or partial forgiveness of debt
• May help avoid having debts sent to collections
• Debt settlement companies can negotiate with creditors for you

Cons

• Hefty fees may apply
• No guarantee that debts will be settled
• Balances may increase while negotiating
• Can take years to settle debt
• Settled debt may be taxable
• Will severely damage your credit
• Debts can remain on your credit reports for up to 7 years from the start of delinquency
• May be difficult to qualify for a loan afterwards

Bankruptcy

Pros

• Potential for full or partial forgiveness of debts
• Certain back taxes may be eligible for dismissal
• When you file, an automatic stay prevents creditors from trying to collect debts from you
• Chapter 13 bankruptcy can halt foreclosure proceedings

Cons

• Filing and court fees can be expensive
• May need to liquidate assets to repay debts
• Can severely damage your credit
• Can remain on your credit reports for 7–10 years
• May be difficult to qualify for a loan afterwards
• May still be responsible for some debts

Retirement Savings Plans

If debt is a barrier to saving for retirement, consider working with a credit counselor to get on track. But you can also work to improve your financial situation in other ways as you prepare for retirement. Look at your budget to determine if you can cut any expenses, allocate windfalls toward your retirement savings, and consider picking up a side gig that aligns with your interests.