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How Debt Restructuring Differs From Debt Settlement

Dealing with debt can be really stressful and overwhelming. Like, trying to figure out the best options to manage debts or get them paid off is confusing. There are a few main ways people try to handle debts – two common options are debt restructuring and debt settlement. But what exactly do those mean and how are they different? Let’s break it down.

What is Debt Restructuring?

Debt restructuring basically means changing the terms of your existing debts to make them more manageable. The main ways debts get restructured are:

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  • Getting a lower interest rate – This lowers your monthly payments so more goes toward paying down the principal balance. Banks may do this to keep you paying rather than defaulting completely.
  • Extending the repayment term – Getting a longer time to pay back the debt means smaller monthly payments. This helps free up cash flow but means paying more interest over time.
  • Rolling multiple debts into one – Consolidating multiple credit cards or loans into a single new loan with one payment can simplify things.
  • Temporarily reducing or suspending payments – Lenders may let you pause payments or pay less for a short time if you’re going through a rough patch.

The goal of restructuring is basically to make your current debt load more affordable and prevent you from defaulting. It doesn’t make debts go away completely.

What is Debt Settlement?

With debt settlement, the goal is to pay off your debts for less than the full amount owed. You stop making payments to creditors and instead save up money to offer a lump sum settlement payment. Here’s a quick rundown:

  • You stop paying creditors and let your accounts go delinquent
  • A debt settlement company negotiates with your creditors for a reduced payoff amount
  • You make monthly payments into an escrow account to save up enough to settle debts
  • Once enough is saved up, the settlement funds get paid to creditors and they agree to forgive the remaining balance

So in a nutshell – debt settlement is about paying back less than you owe by letting accounts fall behind to force creditors to take a settlement deal.

Key Differences

There are some major differences between these two options:

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Impact on Credit

  • Debt restructuring usually doesn’t hurt your credit if you keep accounts current and in good standing. It can actually help your credit utilization ratio by lowering interest rates and payments.
  • Debt settlement often trashes your credit because accounts must go delinquent for creditors to agree to settle. This can stay on your credit report for 7 years.


  • Debt restructuring has little or no upfront fees. It focuses on lowering ongoing costs through interest rate reductions.
  • Debt settlement often has hefty enrollment fees of 15-25% of the total debt amount. You also stop paying debts which leaves you open to late fees, penalties and potential legal action.

Debt Relief

  • Restructuring gives temporary financial relief through lower payments, but total amount owed usually stays the same.
  • Settlements can eliminate up to 50% or more of your balance owed. But less than half of proposed settlements get approved on average.

Time to Resolve

  • Debt restructuring gives immediate monthly payment relief. But debts still take years to pay off.
  • Debt settlement can take 3-5 years to save enough to make settlement offers and pay off accounts. And there’s no guarantee creditors will accept the deals.


  • The main risk with debt restructuring is that reduced payments may not be affordable long-term. This could lead debts to eventually go into default if you can’t keep up.
  • Debt settlement carries multiple risks – damage to credit, legal collections efforts, tax liability on forgiven debt, or creditors refusing settlement offers and demanding full repayment.

Which is Better for You?

So which option – debt restructuring or debt settlement – is likely to be better for your situation? Here are some things to think about:

Your financial situation

If temporary relief is all you need, restructuring may get you through a temporary hardship. But if you’re drowning in debt you have no hope of paying in full, settlement could eliminate a substantial chunk.

Your credit needs

If your credit is critical – for example, if you’ll need to qualify for a mortgage soon – then stay away from settlement. The delinquencies would likely sink your credit for years. Restructuring is less likely to hurt scores.

Your savings

Without the ability to stash away lump sums, the savings-based debt settlement process won’t be feasible. Having some savings makes it more practical.

Your risk tolerance

A debt restructuring plan is essentially sticking to revised terms of your original credit agreements. Debt settlement often comes with legal and tax risks creditors may balk at reduced offers. If you prefer to play it safe, restructuring may be better aligned.

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Getting Help

Restructuring and settling debt yourself is very difficult. Getting expert help can make the process smoother. This could include assistance from:

  • Credit counseling agencies – Non-profit agencies help organize your finances, contact creditors and set up debt management plans (DMPs). Fees are usually small or nonexistent.
  • Debt settlement companies – For-profit companies have experience negotiating with creditors. They take a percentage of enrolled debt as fees, but handle the settlement process for you.
  • Bankruptcy attorneys – Legal experts can help determine if bankruptcy may be your best path to finding financial relief. They can handle filing paperwork and representing you in court.
  • Financial advisors – Advisors help analyze your full financial picture and cash flow to determine optimal debt solutions tailored to your situation.

If you choose a debt relief company, be sure to research reputation, fees and success rates thoroughly before enrolling. Reputable firms are upfront about risks and results.

The Bottom Line

Debt restructuring and debt settlement take very different approaches to finding financial relief, so weigh the pros and cons carefully. There’s no one-size-fits-all solution. The path that aligns best depends on your specific financial situation and debt relief goals. But either option is likely to be more effective with the guidance of a credit counseling agency, debt settlement firm or financial advisor. Relief from debt may seem out of reach, but taking that first step to understand your options can go a long way.

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