Chat with us, powered by LiveChat


The Difference Between Debt Settlement and Debt Consolidation

Dealing with debt can be overwhelming. When you’ve accumulated multiple debts across various credit cards, loans, and other sources, it can feel like you’re drowning with no way to get your head above water. That’s why many people turn to solutions like debt settlement or debt consolidation to help regain control of their finances. But what exactly is the difference between these two options?

- -

What is Debt Settlement?

Debt settlement, also sometimes called debt negotiation or debt arbitration, is a process where you work with a debt settlement company to negotiate down your total debt owed to creditors. The goal is to pay less than the full amount you owe by making a lump sum payment to settle accounts.

Here’s a quick rundown of how debt settlement works:

  • You stop making payments to creditors and instead put money into a dedicated account. This is so you can save up enough to make settlement offers.
  • The debt settlement company negotiates with your creditors to try to get them to agree to accept a smaller lump sum payment – usually between 30-50% of what you owe – to consider the account settled in full.
  • Once enough money has accumulated in your account to make settlement offers, the debt settlement company will contact creditors to negotiate a deal. If accepted, they pay the settlement amount from your account.
  • This process is repeated across all your eligible debts until everything has been reduced and settled.

Debt settlement can be an attractive option because it can reduce total debt owed by quite a bit. However, it also comes with some potential drawbacks:

  • Your credit score will take a hit because you have to stop making payments while saving up for settlements. Accounts become delinquent, which damages your credit.
  • You may get sued or have to deal with aggressive debt collection efforts during the settlement period. Creditors don’t like when you stop paying.
  • Settlements are considered taxable income, so you’ll have to pay taxes on the amount of debt forgiven in a settlement.
  • Debt settlement companies often charge hefty fees amounting to 15-25% of your total enrolled debt. This eats into any savings.
  • There’s no guarantee your creditors will accept a settlement offer. They may refuse and still expect full payment.

Overall, debt settlement can make sense for those with limited funds who need deep reductions in what they owe. However, the credit damage and risks mean it’s not right for everyone.

- -

What is Debt Consolidation?

In contrast to reducing debt through settlement, debt consolidation focuses on streamlining multiple debts into one new consolidated loan or credit account. This can make repayment easier to manage.

Here are some key things to know about debt consolidation:

  • You take out a new consolidation loan or transfer balances to a new credit card to pay off your existing debts. This combines everything into one account with one monthly payment.
  • Ideally, the interest rate on the consolidation loan or card is lower than what you were paying across multiple accounts. This saves money on interest.
  • Having just one payment can simplify the repayment process and makes it easier to budget each month.
  • Your credit score is not damaged like with debt settlement, as long as you continue making on-time payments.
  • Debt consolidation does not reduce the amount you owe. You still have to pay back the full debt over time.
  • Consolidation loans often have origination fees, and balance transfer cards may charge a balance transfer fee. But overall fees are lower than debt settlement.
  • You need a good credit score to qualify for the best consolidation loans and cards. Poor credit means higher interest rates.

The bottom line is that debt consolidation streamlines repayment through consolidation without damaging your credit. However, it does not reduce your total debt like settlement does.

Key Differences Between Debt Settlement and Consolidation

Now that we’ve explained the basics of each option, let’s recap the major differences:

  • Debt Reduction – Settlements can reduce debt owed by 30-50% through lump sum payoffs. Consolidation does not lower total debt owed.
  • Impact on Credit – Settlements hurt your credit through missed payments and settled accounts. Consolidation allows you to preserve your credit.
  • Cost – Debt settlement companies charge hefty fees, often 15-25% of total debt enrolled. Consolidation loans have lower origination fees.
  • Qualification – Anyone can do debt settlement if they have funds to save up for settlements. Good credit is needed for the best consolidation loan terms.
  • Simplicity – Consolidation creates one easy monthly payment. Settlements require stopping payments to creditors while settling each account individually.
  • Risks – Debt settlement carries risks like getting sued and settlement offers being rejected. Consolidation is lower risk as long as you keep making payments.

As you can see, each option has pros and cons depending on your specific situation. Settlement provides deep debt reduction but with credit damage. Consolidation makes repaying easier without reducing what you owe.

- -

When Debt Settlement is the Better Choice

In certain situations, the benefits of debt settlement outweigh the downsides. Here are some examples of when settlement could be the right move:

  • You have a large amount of unsecured debt relative to your income that would take decades to repay in full. Settlements provide a way out.
  • You have already missed payments and your credit score is already suffering. Further damage from settlement is less of an issue.
  • You receive a windfall like an inheritance or bonus that allows you to make lump sum settlement offers.
  • You have mostly charged-off or delinquent accounts where creditors may be eager to settle rather than receive nothing.
  • You have a lot of high-interest credit card balances accruing interest rapidly. Settlements let you avoid that.
  • You lost your job or had another income disruption that makes it impossible to keep up with minimum payments.

The common theme is having high debt relative to income and limited ability to repay through conventional methods. Debt settlement lets you resolve debts you otherwise may never get out from under.

Just be aware of the risks and make sure to vet any debt settlement company thoroughly before enrolling.

- -

When Debt Consolidation is the Better Choice

Debt consolidation tends to be the better option for those with good credit and the financial discipline to take advantage of the benefits. Here are some instances where consolidation makes more sense than settlement:

  • Your credit score is good and allows you to qualify for a low interest consolidation loan. Reduced interest costs add up.
  • You have federal student loans eligible for Direct Consolidation. This can provide access to income-driven repayment and public service loan forgiveness.
  • You have high-interest credit card balances you can pay off quicker by consolidating into a lower rate.
  • You have various installment loans like auto loans at decent rates that make sense to keep rather than settle.
  • You need the simplicity of one payment to help stay organized with repayment.
  • You want to avoid damaging your credit score further through missed payments and settlements.
  • You are current on payments but struggle with multiple due dates and minimum payments each month.
  • You have a steady income that allows you to repay debts in full over time by consolidating.

Consolidation works best for those who got into debt responsibly and want to optimize repayment without destroying their credit or accepting reduced payoffs.

Questions to Ask Yourself

Deciding between debt settlement and consolidation depends largely on your specific financial situation and priorities. Here are some key questions to ask yourself:

  • How much total debt do I have relative to my income? Is it realistically repayable as is?
  • Is my credit score already damaged from missed payments or do I need to protect it?
  • Do I have a large amount of high-interest credit card debt accruing interest rapidly?
  • Am I current on payments but struggling with multiple bills each month?
  • Can I qualify for a consolidation loan with a lower interest rate than I’m paying now?
  • Do I have a steady income that allows me to continue making monthly payments?
  • Have my debts already gone into delinquency or charge-off status?
  • Will I be able to avoid taking on more debt and repeating past mistakes if I consolidate?

Really take time to consider your personal situation and ability to repay when weighing these options. Be realistic about your spending habits and commitment to following a consolidated repayment plan.

Getting Help Evaluating Your Options

With so many factors to weigh, it can help to talk to a professional when deciding between debt settlement and consolidation. Here are some options:

  • Consult with a non-profit credit counseling agency like They can provide guidance based on your finances.
  • Talk to a debt settlement company for perspective on your settlement options. Just be wary of unrealistic claims. Thoroughly vet any company before enrolling.
  • Speak with a financial advisor or accountant for objective third-party advice. Make sure they consider your entire financial picture.
  • Contact lenders like your bank or credit union about consolidation loan options and pre-qualification.
  • Reach out to legal aid organizations if you need help dealing with debt collectors or lawsuits.

Don’t struggle alone. Get expert assistance evaluating the pros and cons of each option for your situation. This can provide peace of mind you are making the right choice.


When faced with overwhelming amounts of debt, both debt settlement and debt consolidation can be viable solutions – each with their own sets of advantages and drawbacks. Debt settlement provides deep reduction of what you owe but at the cost of damaging your credit. Debt consolidation leaves the total debt in place but makes it easier to repay without further credit damage.

Carefully consider your specific circumstances like income, expenses, credit score and ability to repay. This will allow you to determine which strategy may be right for your needs. With professional guidance, you can develop a plan to take control of your debt and regain your financial freedom.

Delancey Street is here for you

Our team is available always to help you. Regardless of whether you need advice, or just want to run a scenario by us. We take pride in the fact our team loves working with our clients - and truly cares about their financial and mental wellbeing.

"Super fast, and super courteous, Delancey Street is amazing"
$500,000 MCA Restructured Over 3 Years
"Thanks for helping me in literally 24 hours"
$250,000 SBA Loan Offer in Compromise
"Great choice for business owners who need a trustworthy partner"
$350,000 MCA Restructured Over 2 Years

In The Media

Delancey Street CEO discusses ways to reward employees
Delancey Street CEO discusses the benefits of franchising on Forbes.
Delancey Street CEO discusses management on AMEX.
Best and Worst Student Loans in NY

As a student in New York, navigating the complex world…

Navigating Spousal Credit Card Debt: What You Need to Know

Will you pay your wife’s credit card debt? It’s a…

Divorce Debt Dilemma: Will You Foot Her Credit Bill?

Divorce is never easy, but when credit card debt enters…

Dividing Debt: Navigating Credit Card Obligations in Divorce

Divorce is a challenging process, both emotionally and financially. One…

Credit Card Forgiveness for Elderly: How to Apply

Credit Card Forgiveness for Elderly: How to Apply Credit card debt can be a significant…

Delancey Street simply gets it. You're talking to experts.
Steven Norris
Get Help Today

Ready To Get Started?

If you have questions, feel free to shoot us an email, or fill out our live chat.

Schedule Consultation