If you’re struggling with debt, you may be looking for a way to get back on track. Two common options are credit counseling and debt settlement. While both aim to help you manage debt, they work in very different ways.
This article breaks down how each option works, how they differ, and what to consider when choosing the right path for your situation.
What Is Credit Counseling?
Credit counseling is a service that helps people manage unsecured debt, such as credit cards, medical bills, or personal loans. It’s typically offered by nonprofit organizations whose goal is to help you pay off your debt in full while building better money habits.
When you work with a credit counselor, they start by reviewing your finances—your income, debts, and spending habits. From there, they may recommend a debt management plan (DMP) or offer other tools to help you regain control of your budget.
Credit counseling is best suited for people who can afford to repay their debts but need help staying organized or negotiating better terms with creditors.
Common Services Offered
Debt Management Plans (DMPs)
These plans combine multiple unsecured debts into one monthly payment. The credit counseling agency works with your creditors to try to reduce interest rates or waive late fees. You make one payment to the agency, and they distribute it to your creditors.
Budgeting Support
Counselors help you create a monthly budget that aligns with your income and spending. This can include tips on cutting expenses, setting savings goals, or avoiding future debt.
Credit Report Review
Some agencies offer help understanding your credit report and identifying ways to improve your financial habits. They may also give advice on how to avoid common credit pitfalls.
Potential Limitations
No Debt Reduction
Credit counseling doesn’t lower the total amount you owe. You’re still expected to repay the full balance—often over several years.
Requires Long-Term Commitment
DMPs typically last three to five years. You’ll need to make consistent, on-time payments for the plan to work. Missing payments can cause the plan to fail.
Not All Creditors May Participate
Some creditors may choose not to work with the agency. If that happens, you’ll need to manage those accounts separately, which can complicate your repayment efforts.
What Is Debt Settlement?
Debt settlement is a strategy that focuses on reducing the total amount of unsecured debt you owe. It typically involves working with a for-profit company that negotiates directly with your creditors to settle your debts for less than the full balance—often through a lump-sum payment or structured settlement plan.
This option is generally for people who are already behind on payments and cannot afford to pay their full balances. Because settlement means not paying the full amount, it can negatively affect your credit score in the short term. Also, the amount of debt forgiven may be considered taxable income by the IRS. However, for some, the potential savings and faster timeline can make it worth considering.
How It Works
Initial Consultation
The process usually begins with a free consultation. A debt specialist will review your debts, income, and goals to determine if settlement could be a viable option.
Account Setup and Savings Plan
If you enroll, you typically stop making payments to your creditors and instead start setting aside money in a dedicated account. This account will eventually be used to pay settlements once agreements are reached.
Negotiation With Creditors
The company negotiates with creditors to accept less than the amount owed. If successful, you’ll pay a lump sum or a series of reduced payments to settle the debt.
Key Differences Between Credit Counseling and Debt Settlement
Both credit counseling and debt settlement are designed to help people manage unsecured debt, but they do so in very different ways. Here’s a side-by-side comparison to help clarify how they differ.
| Feature | Credit Counseling | Debt Settlement |
| Debt Balance | Full repayment, possibly with reduced interest or fees | May reduce total amount owed through negotiation |
| Time to Resolution | Typically 3–5 years | Typically 2–4 years |
| Payment Structure | One monthly payment to agency, distributed to creditors | Funds saved in a separate account and used to settle debts |
| Credit Impact | May be mild if payments stay current; some accounts may close | Likely initial negative impact |
| Best Fit For | People who can afford monthly payments and want to repay debt | People behind on payments who can’t repay full balances |
Other Options to Consider
Credit counseling and debt settlement aren’t the only ways to manage debt. Depending on your situation, there may be other strategies worth exploring.
Debt Consolidation
Debt consolidation involves taking out a new loan to combine multiple debts into one. The goal is to simplify your payments and possibly lower your interest rate.
This option may be a good fit if:
- You have good credit and qualify for a lower-rate loan
- You want to streamline multiple high-interest payments into one
- You’re confident you can repay the new loan on time
Keep in mind that consolidation doesn’t reduce the amount you owe—it just restructures it.
Bankruptcy
Bankruptcy is a legal process that can help people who can’t afford to repay their debts. There are different types of bankruptcy, but they generally fall into two categories:
- Chapter 7, which may discharge most unsecured debts
- Chapter 13, which involves a repayment plan over several years
Bankruptcy may offer a fresh start, but it also has long-lasting effects on your credit and financial record. It’s often considered a last resort and should be discussed with a qualified bankruptcy attorney.
Final Thoughts
If you’re struggling with debt, it’s important to understand your options. Both credit counseling and debt settlement can help, but they serve different needs.
Credit counseling may work well if you can afford to repay your debt in full with a structured plan and lower interest rates. Debt settlement might be an option if you’re behind on payments and can’t manage the total amount you owe.
Each approach has pros and cons, and the right choice depends on your financial situation, goals, and comfort with risk.
If you’re considering debt settlement, SmartSpending may be able to help. Our team works with people who are facing unmanageable debt to develop customized settlement plans. Apply today to find out if you qualify.
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