Debt Consolidation or Debt Settlement: What is the Difference and Which One to Choose

Gibran Selman

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Debt can be considered to be a phase of life many people go through every day. The increased costs of living, family demands and credit cards are the main culprits that bring about debt. When in debt, accepting the fact that you are in debt covers half the hurdle of overcoming debt. The other half is deciding between debt consolidation and debt settlement.

Basically, debt settlement and debt consolidation help in eliminating debt; however, they have their individual consequences upon your credit score and finance future. So it is better to learn the advantages and disadvantages of both, to decide on which is the better choice for you.

With a debt settlement program, part of your debt is eliminated by the creditor, where you experience instant relief in your monthly budget. You have to make lowered monthly payments, and so the new monthly installment is rather manageable. With these lowered monthly payments, you can rebuild your credit rating by making punctual payments, and clearing your debts step by step.

Though debt settlement seems to be rather feasible, there are some disadvantages to it. The main point here is that there is an immediate effect on the credit score through debt settlement. This is because debt settlement is considered to be more of a foreclosure where your credit score is 500 or less. And after this, if you aim at improving your credit score, you can work only with sub prime lenders. There are also the tax authorities you have to deal with after debt settlement. This is because the IRS considers debt settlement like the receipt of a cash gift or some income. Sometimes, depending on where you live, you will also have to pay some additional state taxes.

Debt consolidation is another means of clearing debts that is rather beneficial to you. With a debt consolidation loan, the debt consolidation company works at negotiating lower interest rates with your creditors. Once the interest rates are reduced, you make only a single payment to them every month, instead of numerous payments to individual creditors. The debt consolidation company then pays your creditors on your behalf. All the paperwork, cancellation fees and closing of accounts is done by the debt consolidation service. And with debt consolidation, you are out of debt in five or less years.

However, debt consolidation does not have much impact on your credit score. The most that will happen is that lenders temporarily place a hold on extending credit to you, till you are regular in your payments. However, it is necessary that you confirm that the debt consolidation company makes payments to your creditors as there are some companies that just accept your money, but don’t make the necessary payments. And if the debt consolidation loan has collateral to it, there is always the possibility of you losing the collateral, if you don’t pay back the debt consolidation loan on time.

It can be seen that there is no perfect answer to get out of debt; though debt settlement provides immediate relief from debt, your credit score is at stake. And debt consolidation takes time to relieve you from debt, but has minimum impact on your credit score. So you have to decide on which you need more; time or a credit score and make the decision.

Gibran Selman takes care of a website dedicated to gather information, on and off the internet, about debt consolidation and other related subjects. Visit the website at: for hundreds of articles and other resources about debt consolidation.


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