Debt Consolidation vs. Debt Settlement: Know Your Options
- Debt consolidation combines multiple debts into a new account, with new terms.
- Debt settlement is the process of negotiating with creditors and lenders to reduce how much you owe, either through a debt settlement company that charges fees or by navigating the process on your own.
- There are many risks to debt settlement, including that you’ll accumulate additional interest and fees during negotiations. Creditors may also refuse to agree to a settlement.
- Alternative options you may want to consider include a debt management plan (which is set up through a credit counselor) or, as a last resort, bankruptcy.
When you’re in debt, it can be difficult to know what your best option is for becoming debt-free. After all, every avenue has its pros and cons. If you’re considering debt settlement and debt consolidation, it’s important to understand how they work and when it makes sense to use one versus the other.
In general, debt settlement can be a tricky process to navigate and comes with higher costs and some negative implications for your credit. Debt consolidation, on the other hand, can provide a manageable path out of debt — but you’ll need to qualify.
Let’s dig into these two options, how they work, pros and cons, and alternatives you may want to consider.
Debt consolidation vs. debt settlement
When you’re looking for a way out of debt, you’ll likely come across the terms “debt consolidation” and “debt settlement.” Although they sound similar, there are key differences between these two options:
| Debt consolidation | Debt settlement | |
|---|---|---|
| What is it? | Combining multiple debts to access a lower monthly payment or interest rate | Negotiating with creditors to reduce the amount of money you owe |
| Cost | Varies; can include interest as well as origination or balance transfer fees | You typically must save up a lump sum to pay off the agreed amount, plus fees |
| Credit score requirements | Usually need good to excellent credit to qualify | Typically no credit score requirement |
| Time until debt-free | Depends on the term or how much money you can pay toward your debt each month | There’s typically no guaranteed timeline (and no guarantee of success) |
| Fees | Some loans have origination fees that can run up to 10% (or higher), although no-fee personal loans exist | Debt settlement company fees can be from 15% to 25% of the amount owed (not including late payment fees or accrued interest) |
| Effect on credit score | Might hurt credit initially (due to a hard credit hit), but on-time payments could improve your score over the long run | Expect a dramatic drop — settlements and late payments appear on your credit reports for up to seven years |
| Tax implications | None | Settled debt generally counts as taxable income |
| Account status after payoff | Can continue using cards after you consolidate | You may be required to close accounts, depending on the terms of the settlement |
| Best for | Borrowers with good to excellent credit who want to access lower monthly payments or save on interest charges | Borrowers who are already behind on payments or who can afford to pay off a portion of their existing debt |
| Learn more | Skip to debt consolidation | Skip to debt settlement |
If you’re in dire financial straits, you should consider credit counseling before pursuing options like debt consolidation or settlement.
Credit counseling is provided by nonprofits and typically involves free education and workshops. You may also be able to access a debt management plan through a credit counselor, which may help lower your monthly payments.
Which is best for my situation?
Debt consolidation is typically a better option if you have solid credit, can afford your monthly payments and qualify for a lower APR on a personal loan.
Debt settlement may be worth considering if you are already behind on payments, don’t have the best credit, can’t afford your monthly balance, and want to avoid filing for bankruptcy.
| Situation | Consider |
|---|---|
| Juggling multiple high-interest debts | Debt consolidation |
| Already behind and can’t afford monthly payments | Debt settlement |
| Have fair-to-good credit and can qualify for a lower interest rate | Debt consolidation |
| Are facing collections or considering bankruptcy | Debt settlement |
| Are trying to avoid serious credit score damage | Debt consolidation |
What is debt consolidation?
With debt consolidation, you will take out a new loan or line of credit and use it to pay off multiple debts.
Consolidation doesn’t reduce the amount you owe, but it restructures the debt, often resulting in lower monthly payments or a lower interest rate if you have good to excellent credit. Plus, by consolidating your debt, you only have to make one monthly payment and could save money.
A recent LendingTree study found that consolidating $10,000 of credit card debt with a personal loan could save you $1,750 if you have a credit score of 760 or higher.
Debt consolidation could be best if you:
- Have good to excellent credit
- Qualify for a lower interest rate on a debt consolidation loan
- Can afford to pay back the amount you have borrowed
- Have multiple credit card and/or personal loan bills each month
Ways to consolidate debt
There are several paths to debt consolidation, from loans to balance transfer credit cards. The best option will depend on factors like how much you can afford to pay each month, what fees you’re willing to pay and whether or not you own a home.
Debt consolidation loan: A debt consolidation loan is a type of personal loan that’s distributed as a single lump sum of money. You’ll pay back the loan in fixed monthly installments plus interest. Because debt consolidation loans are usually unsecured, they don’t require collateral.
Balance transfer credit card: A balance transfer lets you move existing credit card debt to a new card, ideally one with a more favorable rate. Some balance transfer credit cards have 0% APR introductory periods, but you’ll need at least good credit in order to qualify. You’ll typically pay a balance transfer fee.
Home equity loan or home equity line of credit (HELOC): You could take out either a home equity loan or a HELOC to pay off debt, though your home will be used as collateral. If you fall behind on these types of loans, you could lose the roof over your head. At the same time, rates are generally low, since there’s less risk for the lender.
Cash-out refinance on your mortgage: A cash-out refinance lets you take out a new, larger mortgage on your home. The cash-out refi will pay off your existing mortgage and allow you to pocket the overage (which you could use to pay debt). Like the options above, cash-out refinances are risky because your home is collateral.
Pros and cons of debt consolidation
Debt consolidation is popular. In January 2026, 38% of LendingTree personal loan inquiries were for debt consolidation, and another 17.3% were for credit card refinancing. Still, like other personal finance tools, debt consolidation has positives and negatives.
Pros
- Lower interest. Your APR on a debt consolidation loan might be lower than what you’re currently paying (if you have strong credit).
- Streamlined billing. After you consolidate, you’ll only have one debt payment each month.
- Could get you out of debt faster. A shorter term on a debt consolidation loan means you could be out of debt sooner.
Cons
- Doesn’t eliminate debt. You’ll still pay the full balance of what you owe if you consolidate.
- Origination fees. Lenders sometimes keep a portion of your loan for themselves as an extra charge (called an origination fee).
- Usually requires at least good credit. You might not qualify for a better APR on a consolidation loan if you have bad credit.
What is debt settlement?
Debt settlement (also called debt relief) involves negotiating with your creditors to reduce the amount of money you owe — though success is never guaranteed.
We generally don’t recommend debt settlement, especially if you go through a professional debt settlement company that charges substantial fees. What’s more, it’s worth exploring if it’s still possible to negotiate a settlement if your creditor has already charged off your debt.
If it’s been charged off, the creditor has declared your debt a loss and is not expecting repayment. This doesn’t mean, however, that you no longer owe the money — your debt may be sold to a collection agency.
Debt settlement could be best if you:
- Are comfortable taking the DIY route instead of hiring a debt settlement company
- Have more debt than you can handle
- Already have a low credit score
- Will save money by settling, even considering fees, interest and tax implications
- Don’t qualify for Chapter 7 and don’t want to file for Chapter 13 (which requires a repayment plan)
How to attempt a DIY debt settlement
If you believe that debt settlement is right for you, handling negotiations yourself could be the better option. This process can be time consuming, but doing it yourself allows you to skip the fees that debt settlement companies typically charge.
If your creditor hasn’t charged off your debt, you’ll probably work with your creditor itself. If your creditor has sent your debt to collections, then you will negotiate with a debt collection agency or law firm.
1. Do your research. Instead of hiring a for-profit debt-relief company, learn how to settle debts yourself. Consider the strategies below:
- Offer a lump-sum payment. The credit card company might agree to reduce the amount you owe.
- Ask for a workout agreement. A workout agreement permanently changes your cardholder agreement. Your issuer might lower your APR or minimum monthly payment.
- See if forbearance is an option. Forbearance could temporarily pause your payments (but interest may still accrue). Creditors might be more inclined to offer forbearance if you haven’t yet missed a payment or aren’t that far behind.
2. Gather documents. Your creditor might be willing to settle if you can provide a reason for your financial hardship. If you’ve been laid off or had to take an extended leave of absence from work, show them paperwork to back up your claim.
3. Move cautiously. We strongly advise you to continue making your current credit card payments. If you stop, make sure that you are fully aware of the interest, fees and credit score impact that will follow.
4. Get it in writing. Don’t count on your call being recorded. Make sure your credit card company sends you the terms of your new agreement.
The risks of debt settlement
On average, the professional debt settlement process takes three to four years.
When you hire a professional debt settlement company, it will usually direct you to stop making your debt payments. Instead, you’ll put that money into a dedicated account. Once you’ve “saved” enough money, the debt settlement company will use the account to negotiate.
If you choose to go that route, here are the risks you should consider:
If the debt settlement company is successful, it will charge you a fee for its service. These fees generally range from 15% to 25% of the total debt you owe.
There’s no guarantee that debt settlement will work. Your creditors decide whether they will settle and for how much. Not only that, but debt settlement scams exist, and some companies overpromise. If you aren’t careful, you could hand over your hard-earned money and get no results.
May make it hard to borrow in the future. Even if your creditor is open to working with you, your settled payment will show as “settled” on your credit reports. This is a signal to future lenders that you weren’t able to pay your full balance.
Can tank your credit score. You might stop paying your creditors during the debt settlement process. This delinquent debt could show on credit reports for up to seven years, even after you’ve paid (or settled) it.
You might end up with more debt than when you started. When you stop making payments, interest and late fees will begin to accrue. This is true even if you’re in the debt settlement process. Interest and fees might even cause you to exceed your credit limit, which could trigger even more fees.
You could be at risk for a lawsuit. The collection process doesn’t stop when you work with a debt settlement company. Failing to make regular payments could get you sued by debt collectors.
You might have to pay more in taxes. Generally, the IRS counts settled debt as income. For example, if you settle $10,000 of credit card debt for $3,000, you’ll owe federal taxes on $7,000.
How to consolidate your debt with LendingTree
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Alternatives to debt consolidation and debt settlement
Debt management plan
Best for those looking to lower their monthly payments
You could work with a nonprofit agency and come up with a debt management plan. This strategy works best when you’re ready to examine (and change) your financial habits. Although you’ll pay the full amount you owe, you could be out of debt in three to five years. You also can’t use (or open new) credit cards while under the plan.
You’ll work with a certified credit counselor who will attempt to negotiate your monthly payments, interest rates and fees. Your credit counselor will collect your payment and pay your creditors on your behalf. Debt management plans can come with monthly fees ranging from $25 to $50, as well as set-up fees, which may be as much as $75.
To find help near you, visit the U.S. Department of Justice’s credit counseling agency database.
Bankruptcy
Best for borrowers who have exhausted all other options
If it’s clear that you’ll still have more debt than you can handle no matter what choice you make, it might be time to think about bankruptcy.
You might be a good candidate for Chapter 7 bankruptcy if you have few assets and a lower income. Also called liquidation bankruptcy, Chapter 7 requires you to sell certain possessions to pay down your debt, while the remaining balances are forgiven.
Under Chapter 13 bankruptcy, you can keep your assets while making monthly payments under a court-approved payment plan for three to five years. You’ll follow a strict repayment plan for three to five years, and you may or may not be required to pay off all of what you owe.
Frequently asked questions
Debt consolidation combines multiple existing debts into a new loan with new terms. Meanwhile, debt settlement relies on negotiating with your lender or creditor to lower the amount you owe — though that result is never guaranteed, even if you go through a professional debt settlement company.
Yes, debt settlement can hurt your credit score for a couple of reasons: First, if you stop payments on your existing debt during negotiations, this will result in negative marks for your payment history. Second, if you successfully settle your debt with the company, that information will appear on your credit report and can severely damage your score for up to seven years.
You may be able to qualify for a debt consolidation loan even if you have bad credit. However, keep in mind that you’ll typically face higher APRs, and thus total costs, than a borrower with a higher credit score. Regardless, it’s important to shop around for the best deal.
Yes, any settled debt amount is typically considered taxable income by the IRS. It’s important to consider this when weighing your options, such as whether a debt management plan may make more sense for your situation.
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