Debt Settlement vs Debt Consolidation

Figuring out the difference between debt settlement vs debt consolidation can be confusing. But the primary reason you might be struggling with figuring out the difference is because you typically have two competing teams that are trying to persuade you one direction or another.

Debt Settlement – What is It?

Debt settlement is the process of coming to a meeting of the minds between you and a creditor. In its purest form it’s just an agreement where the creditor agrees to accept less than the full balance owed to satisfy your current balance.

The easiest way to think about debt settlement is if a friend owed you $100 but only had $75 to repay you. You might just say that’s good enough and don’t worry about the rest. If you do that then you just engaged in debt settlement.

Most people have more than one creditor and all creditors are not equally excited to consider debt settlement. For example, when it comes to student loans a private student loan creditor may be interested in settling the debt while a federal student loan servicer has little to no interest in it at all.

The creditors that are the most willing to make your debt go away for less than you owe are unsecured creditors, that is to say, credit card companies. The credit card lenders settle debt every day if you know how to do it.


One concern you may have is if debt settlement is ethical. The short answer is it sure is. Debt settlement isn’t a trick, it’s a strategy. But not all of your creditors may agree to settle your debt for less than you owe so in that case you may wind up disappointed if all don’t want to play along.

Debt Settlement vs Debt Consolidation

It is easy for you to miss the target and settle all the debt you owe. And this is why it is critically important for you to work with a knowledgeable professional who can evaluate your creditors and explain which are more likely to settle. There is no doubt that the FTC advice of doing some homework first about debt settlement is a smart thing to do.

And to help you with that homework here are a couple of guides to help you evaluate debt settlement companies you may work with.

Debt Consolidation – It’s Totally Different

Comparing debt settlement vs debt consolidation can be especially tough since debt consolidation can mean more than one thing.

In the purest definition debt consolidation is a new loan to pay off old debt. But to make the situation even more confusing, you could actually obtain a consolidation loan to pay for debt settlements.

If you are looking to get a debt consolidation loan one place to consider is LendingClub and another is Prosper.

But if you want to know more about the pros and cons of getting a debt consolidation loan, read this.

Debt Settlement vs Debt Consolidation

Don’t assume you know what debt settlement or debt consolidation are and their effectiveness is getting out of debt. Both approaches have valid times they should be used but it will really take a knowledge debt professional to help you assess when.