Differences between debt settlement, debt consolidation, financial counseling & credit restoration.

Sperity Credit Expert Jan 31, 2018 11:43:47 AM written by Sperity Credit Expert

Debt Settlement - is an approach to debt reduction in which the consumer (or company on behalf of the consumer) and a creditor agree on a reduced balance that will be regarded as payment in full.  During a negotiation period, all payments by the consumer are made to the debt settlement company, which typically withholds the payments in an escrow account until enough funds have been built up to begin the offering of a reduced amount to the creditor(s). 

PROSif the creditor(s) are willing to settle, you can reduce the amount of outstanding debt by 40-60%. When the account has been satisfied, it can release the consumer from further collection or escalated legal activity in some cases. It could potentially release debt load when applying for credit where debt to income ratio is reviewed. 

CONSNot all creditors are willing to make settlement arrangements and those that are willing are typically only willing when the account is in a certain state of default. Meaning the account has been so far delinquent that it has charged off, in collections, or possibly even a judgment being filed/entered. The negative payment history and additional collection/public records can have a lowering effect on the credit score for up to 7 years or longer which could cost the consumer more in the long run in higher than normal interest rates or denial of other loan products that could otherwise provide various forms of financial relief.


Debt Consolidation – is a form of debt refinancing that entails taking out one loan/line of credit to pay off many others resulting in one monthly payment that is hopefully lower than the combined min. payments of the many others it replaces and hopefully at a lower interest rate overall.

PROSCommonly, the pros are going to be the simplicity of a single monthly payment vs. many and at a lower cost monthly/over time. Typically will have a lower overall rate of interest which helps with the long term savings. Free’s up available income for debt to income requirements on other larger purchases. 

CONSNot easily accessible to many that are in need of its benefits. Most utilize the equity in their home, auto, other assets to secure the funds needed to pay off the other accounts or simply get a personal (signature) loan that is unsecured. To qualify for these products it requires good – excellent credit and the free title of an auto or the available equity of a home in order to benefit. Many that are in NEED of consolidation are struggling financially which the credit will typically reflect taking most of these options off the table.  


Credit (Financial) Counseling – is a form of debt negotiation/re-organization that is used to help consumers that are overwhelmed with their current debt and monthly obligations. Often used as an alternative to filing for Chapter 13 Bankruptcy, an agency will assist the consumer by negotiating reduced repayment terms or amounts on their overall debt loads with the creditors. Most of these companies are non-profit agencies and does not charge the consumer much for their service as they are compensated by the creditors that they work with that are willing to voluntarily reduce the repayment terms. The agency will structure one monthly payment to cover the cost of all of the accounts that are budgeted and disperse the payment amongst the creditors each month. The repayment plan is usually structured to have all accounts paid off within 36-60 months (3-5 yrs) so it does require the client stay engaged the whole time. 

PROSCan sometimes provide the consumer relief in reducing their current monthly payments and overall interest rates. Provides the consumer with budgeting and educational tools on how to maintain their budget. Provides the consumer with a path to follow to get out of debt in a structured way.  

CONSCreditors that reduce the terms will require the account to be closed, and will add the notation “Account Managed by Financial Counseling” (or similar) that identifies that the account terms have been amended. This is viewed by most lenders and Scoring models view this the same as an account included in Chapter 13 bankruptcy so future lending opportunities may be limited and come at a higher rate of interest in the future. If the client fails to make a payment to the agency one month, it can cause multiple accounts to report a 30 day late at the same time. Additionally, if a client disengages/cancels the service before the accounts are paid off, the creditors can and will hold the client responsible for all amounts previously reduced and could create a further burden on the consumer. This activity can also hinder/reduce the credit scores.  


Credit Restoration – is an approach to correcting one's credit report by challenging and investigating items on your credit report that are misreporting, outdated, obsolete or inaccurate. A legitimate Credit Service Organization will properly educate a consumer on how to manage their credit in order to maximize their credit score potential.

PROS – The correction to one’s credit reports can reduce/eliminate the limitations that the inaccurate negative account information may have had on their ability to qualify for a loan or line of credit.  Credit restoration can also be vital in the consumer’s effort to improve their credit scores as inaccurate information can hinder them.  Being properly educated on how to maintain their credit to maximize their score potential can have a long term benefit of reduced interest rates and more competitive loan products available to the consumer. 

CONS – Since reporting agencies and creditors tend to be resistant to correcting errors on the report, the process tends to be more complicated for your average consumer to navigate the complexities of the investigative process.  While it may not be an overnight fix, an experienced credit restoration company should be able to maximize results within 120 days.

Topics: financial future, Credit + Money

Sperity Credit Expert Jan 31, 2018 11:43:47 AM written by Sperity Credit Expert