Debt Settlement vs. Debt Consolidation: What You Need to Know

If you’re struggling to manage your bills month after month, there are two types of programs that you can use – debt settlement and debt consolidation. The advantages and disadvantages between the two differ, but both aim to make your debt more manageable and help you get out of it sooner. Here, we’ll discuss what each one is all about to help you decide which program better suits your needs.

Debt Settlement

Debt settlement is where you or your representative negotiates with your creditors to “settle” the debt for less than what you originally owed them. For example, if you owed £10,000, you could offer to pay £5,000 instead. If the creditor agrees, your debt is considered paid.

Paying for less than what you really owe may seem like the more attractive choice for many people. But if you owe more than one lender, you’ll need to go through the process with each one of them, during which time you could be charged more in late fees and other charges. Additionally, if you hired a debt settlement company to do this for you, here are some other things to consider:

Company fees – debt settlement companies will charge you a fee to negotiate on your behalf based on how much you owe. So for example, if the charge is 20% to 25% of the final settlement amount, you would owe them another £1,000 to £1,250 in professional fees.

Impact on your credit score – while it may seem that the debt is settled, the fact that you didn’t pay your debt in full will appear on your credit score and could last up to 7 years, making it more difficult for you to get credit in the future.

Time frame – normally, debt settlement cases last for 2 to 3 years, during which time more late fees and penalties are added to the amount you owe.

Tax consequences – the amount of debt that is forgiven may be considered as your income and you might be obliged to pay taxes on them.

With the number of disadvantages attached to debt settlement, this often should be considered only as a last resort and only if you need to avoid bankruptcy.

Debt Consolidation

On the other hand, debt consolidation is another debt management program that could help you if you are overwhelmed with the never-ending bills coming through each month. With debt consolidation, you are basically combining all of your debts into one single loan that entails new rates and repayment terms. However, it should be noted that this option is only for those who are willing to make sacrifices and limit their spending to a minimum.

If it comes to a point that you’re paying only the minimum amount to each creditor you owe, debt consolidation could help you catch up. It simplifies the process of paying your bills, because you’ll be making only one payment at a fixed date per month instead of paying various amounts to multiple creditors with multiple due dates.

Unlike debt settlement, your debt is not forgiven in debt consolidation. You still owe the same amount of money, but the new consolidated loan will have lower interest rates and lower monthly payments. However, it also means that you should be prepared to monitor your spending for about 2 to 5 years because debt consolidation could take that much time before your debt is cleared. You could consolidate your debts through personal loans, balance transfer on credit cards, and home equity loans. Be wary though, that while the last option may be the cheapest of all, this will put your home as collateral and should not be taken lightly. Your property could be at risk for foreclosure if you fail to make payments.


It’s hard to tell which is the better option between the two, because each person has his own unique circumstances. However, one thing is for certain – either of the two programs can be very helpful in managing your debt, provided that you are willing to make a conscious effort to decrease your spending.