Debt Settlement vs. Debt Consolidation

Learn the difference between Debt Management and SettlementDebt settlement and debt consolidation are two potential strategies for people struggling with more debt than they can repay.  Debt settlement can reduce the amount of your debt, while debt consolidation reduces your number of creditors.

Although each is different, debt settlement and debt consolidation have fundamental similarities. Most importantly, both aim to make your debt more manageable. When used properly, either can help you get out of debt sooner and save you money while doing so.

The question for debtors is which option is best for you? If you’re struggling with debt, compare and contrast both strategies before you decide which one to try.

How They Work

In debt settlement, you or a credit counselor working on your behalf will contact each of your creditors and attempt to negotiate a way out. You’ll offer to pay a lump sum that is less than the total amount you owe. If the offer is accepted, your creditor will consider your debt paid.

In debt consolidation, you take out a new loan to pay off the ones you already have. Your new loan likely will have a lower interest rate than what you were paying on the other loans, and your financial situation each month may be greatly simplified.

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How They Differ

With debt settlement, you still owe the same lenders but you may owe them less. It can reduce your loan principal. With debt consolidation, you no longer owe your original lenders. However, your principal stays the same.

Debt settlement involves dealing with an existing creditor, who can choose to accept or reject a settlement offer.  Consolidation does not require consultation with your current creditors, making it more likely to be accomplished on your terms.

When you settle a debt, it is gone forever. Debt consolidation may leave you in debt for a longer period of time. Additionally, you also may be required to put up property — perhaps a home or car — as collateral for a consolidated loan. If you can’t make payments, you risk losing your collateral.

How They Are Similar

Both choices can save you money. Debt settlement can lower your principal, while debt consolidation can save you money in interest.

However, neither will completely erase your debt without your contribution. You are still responsible for paying the debts you owe, at least in part.

Because they can be tricky, both settlement and consolidation are often done with a specialist’s help. A reputable debt-relief firm can help you decide which choice is best for you. A debt-relief firm also can help you negotiate with your creditors or help set up a consolidated loan.

What About Bankruptcy?

Unlike debt settlement and debt consolidation, bankruptcy typically wipes out debt. Although this may seem like a solution to your money problems, it will have lasting consequences on your credit report and still may not remove all the debt you have.

Debt settlement or debt consolidation can help people get back on their feet and eventually clear their debts.

Walter Pacheco

Walter started his nearly 20-year journalism career writing about South Florida's gourmet cuisine and shooting the region's best chefs and their gastronomic creations. He covered municipal politics and redevelopment at the Miami Herald for several years before moving to Orlando, where he helped launch the Orlando Sentinel's first Spanish-language publication, El Sentinel. Several years later, he helped develop the Orlando Sentinel's early breaking news team. He covered Central Florida hottest crime news, including controversial stories like the Casey Anthony murder case and the George Zimmerman story on the shooting death of Trayvon Martin. Walter also wrote about the region's technology and social media industry. He is now the managing editor for, providing online readers a community with news about student loans, debt settlements and loan consolidation.

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