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Debt consolidation loans and debt settlement are confusing topics, because both are a form of debt consolidation. The problem is if you choose the wrong option. One option is often for those who have difficulty paying their bills, while the other option tends to be ones who just want access to cheaper credit.

We are going to cover the pros and cons of both options, but if you’d like to check your rate for debt settlement, use our free calculator below.

Here’s what we will cover:

1) Debt Consolidation Loans Pros and Cons 

2) Debt Settlement Pros and Cons

3) Which should you do?

Let’s get started.

Pros of Debt Consolidation
You can receive a lower rate and save money
You have one payment instead of multiple payments
You can get out of debt faster
Your credit score may improve
You will have a fixed interest rate instead of a variable interest rate
Cons of Debt Consolidation
You will have to pay an origination fee
Your monthly payment can be high
You may not save money on all of the debt you consolidate
You may not have addressed the root cause of the debt
You may face lower payment flexibility if you face financial hardship
Your credit report will have a new hard credit pull

Debt Settlement Pros and Cons

1. How Much You Pay Each Month To Debt Could Go Way Down. Savings.

In debt settlement, you can pay less than what is owed. The savings vary per creditor, but the savings can be upwards of 50% or higher. So, if you have $50,000 in unsecured debt, a debt reduction company would try to negotiate that amount down to say $25,000, so you can save quite a bit of money.

2. Payment Flexibility

Unlike a loan, credit card, or Chapter 13 plan payment, you have more flexibility each month to set how much your monthly draft is that is sent to the escrow bank account. You can have this flexibility if you are not currently in a settlement. 

So, if you’d like to buy Christmas presents for Christmas, some individual may pause the payment for a month to be able to afford presents.

3. Time

If you pay your credit card minimums, it could take several years to payoff your balances. With debt settlement, once the accounts are settled, you are usually on a fixed payment plan from 12-24 months to 100% resolve your credit.

4. Avoid Bankruptcy

While bankruptcy can be a great option for some people, debt settlement allows you to avoid bankruptcy and still get debt relief. For example, if you file a Chapter 7 bankruptcy, your public record will have that mark for 10 years and 7 years for a Chapter bankruptcy. That said you may be able to rebuild your credit after bankruptcy.

5. Financial Flexibility

While it may take 4 years to get a convention loan after bankruptcy, you don’t have those restrictions with debt settlement. That said, you would still need to rebuilt your credit after debt settlement, which we will talk about more in the cons section.

6. Accountability

Most individuals cancel credit card accounts when entering a debt relief program. This provides accountability not to incur new debt and get on a monthly budget. Some individuals appreciate this aspect of a debt settlement program.


1. Potential for Debt Collection Lawsuit

Some creditors may attempt to sue for the unpaid debt in a debt collection lawsuit. Each creditor is different. That’s why it’s important to understand who may sue and who may not sue before entering a debt settlement program or speak to the company about lawsuit likelihood. When we were a debt settlement program, we ran an analysis to help individuals know the lawsuit likelihood by creditor, so we created this free lawsuit likelihood calculator to help you estimate lawsuit likelihood. 

2. Credit Score and Credit Report Impact

Your credit score may be negatively impacted in a debt settlement program. How much will your credit score go down in a debt settlement program. We ran some analysis here that you can view to understand how that works.

In short, if you are behind on your debt and your credit score has already gone down, you may see a lesser drop than if all your accounts are current. If your accounts are all current, you may also compare debt management to debt settlement.

3. Potential Taxes on Forgiven Debt

If you are tax solvent, you may owe taxes on the forgiven debt. If you are tax insolvent, you may not owe taxes on forgiven debt. This is just an estimate, so please speak with a tax advisor to assist.

What is tax solvency? Check out our taxes and debt settlement article covering just how that works to help you understand if you are tax solve for your situation.

4. Late Fees and Interest

The debt settlement company often settles the different accounts when they have funds in the escrow bank account. As such, the actual debt at the time of negotiate is often higher, so the negotiated amount will be a higher amount. The increase may be insignificant, but it’s important to know about it.

5. Potentially More Expensive than Chapter 7 Bankruptcy

When you look at the cost of Chapter 7 bankruptcy, you may find that bankruptcy is both faster and cheaper than debt settlement. While this may not be the case with Chapter 13 bankruptcy, Chapter 7 is often the least expensive debt relief option.

6. Creditor May Not Settle Account

While many creditors settle the debt for less than owed, there may be a creditor that will not settle the debt for less than owed. The debt settlement company you work with should understand who settles and who doesn’t settle before enrollment, so it’s a good question to ask. For example, some credit unions or federal credit unions will not settle debt.

Which Should You Do?

Ultimately it is your decision. If you have visited our debt consolidation loan options page and haven’t qualified, you may be interested to take our free debt settlement vs debt management calculator down below.

Debt management is also known as credit cousenling and may have less severe cons to debt settlement, so we built this free resource to help you make the most informed decision.

If you want to speak with someone from Ascend, please give us a call at 833-272-3631! We are happy to walk you through your options and help you figure out next steps!

Post Author: Ascend

Group of guest writers and industry experts who have specific expertise in Chapter 13 bankruptcy, Chapter 7 bankruptcy, debt relief, debt settlement, and debt payoff.

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