Debt negotiation or settlement

When you settle a debt, you pay less than the full balance you owe. Since creditors typically won't settle debts with consumers who are making their payments on time, most consumers' credit reports will list late payments before they are settled. On top of that, "most creditors will report the settlement as something like 'paid less than full balance' if you settle the debt before it has been charged off," warns Michael Bovee, community manager for Debt Consolidation Care. (Creditors generally charge off debts when borrowers fall 180 days behind. Charged-off debts are then often then turned over to collection agencies.)

 He goes on to explain: "When you settle a charged-off debt, getting it reported (with a) zero balance due will not, in and of itself, help your credit, because the damage has already been done." But it could help you ward off further damage from, say, a potential lawsuit. For an account that hasn't been charged off yet, settling it before it gets to that point can help prevent it from being turned over to collections and adding another negative item to your credit reports.

Brad Stroh, co-CEO of Freedom Debt Relief adds, "Debt settlement hurts people's credit scores but helps their credit profiles. (It's) worth considering, for anyone struggling to pay a lot of credit card debt, despite its negative effects on credit scores. It is far easier to rebuild one's credit than to get out of debt, and people carrying a lot of debt likely have credit problems already."

Credit damage: Severe, will take time to recover

Bankruptcy

It's well known that filing for bankruptcy will hurt your credit scores. Bankruptcies can be reported for up to 10 years from the date of filing. What's not as well understood is that credit scoring algorithms typically segment consumers in subgroups called "scorecards." So if you've experienced a significant negative credit event, such as bankruptcy, for credit-scoring purposes you are probably being compared with other consumers who have also been though something similar. Not only may that be a bit comforting, it can also mean you have a good shot at improving your credit scores if you make a real effort to rebuild good credit after your bankruptcy is discharged.

It's also worth noting that Chapter 13 bankruptcies, where you typically pay back some or all of your debts over a period of three to five years, may be a little easier to recover from, at least as far as your credit is concerned. That's because they come off credit reports seven years after the date of filing. So if it takes you four years to complete your Chapter 13 plan, you have to wait only three more years before the bankruptcy disappears from your reports. (Financially, though, you'll probably end up paying more in a Chapter 13 bankruptcy than in a Chapter 7, where you wipe out all or most of your debts, so make sure you discuss both options with a qualified consumer bankruptcy attorney.)

Credit damage: Severe, will take time to recover 

Getting back on track

Whichever method you choose, keep in mind that the ultimate goal is to pay off your debt so you can save and invest for future goals. The hit to your credit may be worth it if it means you can finally get your balances to zero. Monitor your credit, consider getting a secured card, and keep it in perspective.

"People just worry about their credit too much," says Fox. "If your couch is on fire, would you not throw water on the fire because you don't want to damage the upholstery?"

Click here to become a fan of MSN Money on Facebook

More from Credit.com: