Debt Consolidation vs. Debt Management vs. Debt Settlement

Nadav Shemer
Debt Consolidation vs. Debt Management vs. Debt Settlement
Your credit card debts are spiralling out of control, you’ve cut spending drastically but still can’t keep up with your payments, and now you decide to seek debt relief. The decision to ask for help is a positive step to extricating yourself from the cycle. But now what? How can anyone possibly make sense of all these different types of debt relief?

Debt consolidation, debt management, debt settlement, bankruptcy. These are all types of debt relief, but that’s where the similarities end. In truth, all these products work very differently, none offer a one-size fits all solution, and some options are safer than others.

Understanding all the Debt Relief Options

To understand the different debt relief options, it can help to picture a sliding scale where debt consolidation is the best option, followed by debt management, then debt settlement, and finally bankruptcy after all other options have been exhausted. 

Types of Debt Relief

Type of Debt Relief
Top Pro
Top Con
Debt Consolidation
Consolidates multiple debts into a single loan with one monthly payment.
Reduced interest rate and lower payments
Minor short-term damage to credit score
Debt Management
Debt management provider negotiates with your creditor to get you a lower interest rate or longer term.
Smaller, more manageable monthly payments
Forced closure of other credit accounts
Debt Settlement
Debt attorney negotiates with your creditors to get them to agree to partial repayment.
Being released from part of the debt
Stays on credit score for 7 years
Restructures or eliminates debt in return for appearance before a judge or trustee and loss of non-exempt assets.
Being released from part of all of the debt
Loss of assets and stain on credit report for 10 years

Debt Consolidation Pros and Cons

A debt consolidation loan is like any other personal loan, except that the main or sole purpose is to pay off debts. A debt consolidation loan can be obtained directly from a personal loan lender or facilitated by a debt relief company. Some personal loan providers may offer to transfer the funds directly to your debtor. Others will transfer the money straight to you, leaving it up to you to pay your creditors directly or to use the funds for whatever purpose you wish.

Debt consolidation loans involve the same types of charges as other personal loans, such as interest rates and fees. These days, an increasing number of lenders are dropping the origination fee and making money off the interest rate instead. As with any other instalment loan, late payment penalties apply for failure to make monthly payments. 

Debt consolidation is the simplest and least damaging of the debt relief options. By consolidating multiple credit card debts or loans into one loan, it becomes easier to stay on top of payments. With a good credit score and the right lender, debt consolidation can actually get you a reduced interest rate and reduced monthly payments compared to your old debts. This option can cause slight damage to your credit score. However, if you pay off your debt consolidation loan on time, your credit score should improve in the long term.

Debt Management Pros and Cons

Debt management is often marketed under the names “debt negotiation” or “credit counseling.” All these terms broadly refer to debt management programs, typically involving a consultation session and negotiation. In the negotiation phase, your debt management company negotiates with your creditor to get you a lower interest rate or longer term. The aim is to get a reduced monthly payment, making it easier to pay off your debt. 

There are a few downsides to be aware of with debt management. It usually requires forced closure of credit accounts, which damages your credit score and might also force you to curb your spending for some time. Debt management sometimes involves a reduced balance (like a debt settlement), which can further damage your credit score. In the long run, paying off your negotiated loan is the first step to rebuilding your credit score and improving your ability to borrow or refinance.

Debt Settlement Pros and Cons

Debt settlement involves having a debt attorney negotiate with your creditors to get them to agree to a partial repayment. A debt settlement can be negotiated if your debt is unsecured, as is the case with most credit cards and personal loans. With unsecured debts, the creditor cannot seize any of your assets. They could theoretically take you to court for the amount, but, in many cases, they may consider partial repayment a quicker and less costly option. 

Warning: debt settlement is viewed by the credit agencies as failure to repay debts. It can stay on your credit report for up to 7 years, affecting your ability to get a loan or mortgage, or to refinance. Debt settlement attorneys usually take a cut ranging from around 15%-25% of your savings. Let’s say you have $20,000 in debts and your debt settlement attorney knocks your creditors down to $10,000. You would pay $1,500 to $2,500 in fees for the privilege.


Bankruptcy is really a world of its own, and should only be resorted to when there are no other options left. There are 2 main types of bankruptcy for individuals. Chapter 7 bankruptcy allows people with few or no assets to eliminate unsecured debts such as credit cards. Chapter 13 also allows you to eliminate or restructure debts, but is designed for people with too much cash or too many assets to qualify for Chapter 7.

Bankruptcy carries serious negative consequences. It involves a mandatory appearance before a judge or trustee and the loss of non-exempt assets like investment properties. It can remain on a person’s credit report for up to 10 years, making it difficult to borrow or refinance. 


No 2 debts are equal and no 2 types of debt relief options are the same. If you’ve come to the conclusion that you need relief from the spiral of debt, take the time to read about and understand the different debt relief options before taking the plunge. 

Once you know which debt relief option is best for you, don’t forget to compare providers. Even a few minutes of comparison shopping is better than simply signing up for the first debt relief provider you come across.

Nadav Shemer
Nadav Shemer specializes in business, tech, and energy, with a background in financial journalism, hi-tech and startups. He enjoys writing about the latest innovations in financial services and products.