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What Is the Difference Between Debt Consolidation and Debt Settlement?

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Debt consolidation and debt settlements may sound similar, but consolidation does not reduce debt where a settlement often does. Keep reading to find out more about debt consolidation vs. settlements and which one may be right for you.

Understanding Debt

Debt is a difficult concept to define but technically, it is the financial status that results from borrowing money from another party. This arrangement allows the borrower to make more significant purchases than they normally could. For example, a potential home buyer can afford a house with a mortgage instead of saving for years and purchasing one with cash.

There are, of course, different types of debt and borrowing and these financial obligations have different outcomes for borrowers. The most common types of debt are student loans, auto loans, mortgages, and credit card debt.

Generally, structured borrowing through a student or auto loan or a mortgage is backed by either a bank or the federal government. Credit card debt and personal loans, however, are not as regulated but may be unavoidable for those who cannot afford essentials like groceries or other things.

Credit card debt is uniquely complex because one borrower can have multiple lines of credit from multiple creditors with different loan terms and limitations. Every debt comes with terms whether it is a loan from a friend or the Department of Education. Basic terms include interest amounts, payment due dates, and the agreement to pay back the borrowed amount.

When debt becomes too much, there are two options for debt relief: debt consolidation or debt settlement. Keep reading to learn more.

Debt Consolidation

Debt consolidation does not reduce what the borrower owes. Instead, it combines all qualifying debts under a new loan that reduces the number of creditors and often, the amount of interest.

Consolidating a loan typically involves one monthly payment which is redistributed to each individual debt. In other words, instead of paying $100 per month to ten creditors plus interest, the borrower pays one $1,000 monthly payment to the debt consolidator with a high, but singular interest rate.

Consolidation helps to prevent some of the harsher penalties for debt from wage garnishment to creditor harassment. Debt consolidation also does not necessarily require an in-depth process. Borrowers can consolidate some of their own debts by transferring one credit card balance to another card. Not all cards allow this and there may be significant fees for those that do.

Typically debt consolidation is not a good option. Many with debt feel the payments are high and although many debt consolidation companies promise to reduce the debt, they are frequently not successful which results in the client being served with lawsuit papers. Speak to a bankruptcy lawyer to see which is option is right before pursing debt consolidation.

Debt Settlement

Debt consolidation restructures debt under one creditor but debt settlement is an active negotiation that reduces the amount owed. In other words, a debt settlement should result in a smaller, more manageable balance.

Debt settlement also does not apply to all debts. Only unsecured debt like credit cards or personal loans can be settled in this way. Creditors can be motivated to forgive a small portion of the total debt especially if the stakes for them are higher.

This can happen if they are aware that bankruptcy is the only alternative to debt settlement.


For debt that the borrower cannot pay and where consolidation or settlement is no longer an option, bankruptcy can be a legitimate form of debt relief. Bankruptcy can either reorganize or discharge debt entirely depending on the chapter the borrow qualifies for. However, you should never attempt to file for bankruptcy without the help of a qualified attorney.

If you are considering debt consolidation, settlement, or bankruptcy, contact the Law Office of Seni Popat, P.C. Our attorney can guide you to the most optimal strategy for your situation.