Debt relief and debt settlement are two different strategies to get out of debt, but they work differently. Debt relief refers to any type of strategy that helps reduce your debt load, while debt settlement reduces the amount you owe to your lenders.

When comparing debt relief vs. debt settlement, weigh the pros and cons of each option and learn more about how they work to determine which will work better for your financial situation.

Debt Relief vs. Debt Settlement

Debt relief and debt settlement can help you resolve debts in different ways. Learning more about how they work, the costs involved, and how they impact your credit score can help you make an informed decision.

Key DifferencesDebt ReliefDebt Settlement
How It WorksDebt relief can help reduce your debt burden by reducing the amount of debt you owe, oftentimes by lowering interest rates or streamlining payments.Debt Settlement involves negotiating with lenders to reduce the total amount you owe in return for a single, lump-sum payment that is designed to entirely clear your debt with that creditor.
FeesFees vary by program. Debt management: Setup fee $33, monthly fee $24. Credit counseling- $50/session. Debt Consolidation: 3%-5% balance transfer fees, origination fees, prepayment penalties. Bankruptcy: Attorneys’ fees ($1,500-$3,000), court filing fees ($340), administrative and other miscellaneous fees, plus the long-term costs in terms of higher interest rates on loans, higher insurance rates, and difficulty qualifying for some types of jobs.  15% to 25% of debt enrolled.
Credit Score ImpactThe impact varies by program. Credit counseling, for example, has no impact, while debt consolidation can cause a small dip due to hard inquiries needed to qualify for a consolidation loan.Can lower credit scores significantly because, typically, payments to creditors must be temporarily stopped for several months or more until a lump-sum payment can be saved.
Tax ImplicationsNo state or federal income tax implications since there’s no debt forgiveness, except when using Chapter 7 bankruptcy, and in some cases, with Chapter 13 bankruptcy. However, any debt forgiven under a bankruptcy court’s discharge is exempt from federal and state income taxation.You may owe income taxes on the amount of forgiven debt for the tax year in which your debt is forgiven.

What Are the Differences Between Debt Relief and Debt Settlement?

Understanding the key differences between debt relief and debt settlement is a good starting point for determining which option is the right one for you.  

How They Work

Debt relief can help you resolve debt in a number of different ways, depending on your goals and needs. With debt consolidation, for example, you can combine multiple high-interest debts into a single loan with a lower interest rate to make repayment easier.

With credit counseling, you can get education and guidance on budgeting, money management, and debt repayment.

You can also enroll in a debt management program through which you can enjoy the benefits of a lower interest rate and waived late fees. Plus, you’ll make a single payment each month towards all your debts instead of several payments to different lenders.

With debt settlement, a settlement company will negotiate with lenders and debt collection agencies to reduce how much you owe. You’ll make a lump sum payment, and the lender will forgive the remaining amount to settle your account in full.


It’s also important to know and compare the costs involved with each option. With debt relief, the fees will vary depending on the program you choose. Credit counseling sessions usually cost about $50 per session and are usually affordable for most people who take advantage of this type of debt relief.

Debt management plans involve an upfront setup fee, which costs an average of $33, and an ongoing monthly fee of $24, but it can vary based on state laws.

Debt consolidation will involve taking out a new loan or qualifying for a balance transfer credit card. You’ll typically pay a balance transfer fee, which can range from 3%-5%. With a personal debt consolidation loan, there may be costs like prepayment penalties and origination fees. Interest charges will depend on your credit score and the lender but usually range from 6% to 35%.

With debt settlement, there’s no upfront cost, but you’ll generally pay 15% to 25% of the enrolled debts as a fee to the debt settlement company for negotiating your settlement amount(s) with your lender(s), and for administering the savings account into which you will make deposits until you have enough money in the account to make your lump-sum settlement payment to your creditor(s).

Credit Score Impact

Most debt relief options will impact your credit score in some way. However, a counseling session with a credit counseling agency will not impact your credit score.

If you enroll in debt management, you’ll typically need to close your credit cards, which can increase your utilization ratio and lower your credit score. When you apply for a debt consolidation loan, the hard credit inquiry can also cause a small dip in your score, by about 4-7 points, on average.

Debt settlement can also negatively impact your credit score since you won’t be paying your accounts in full. However, you’ll likely have a lower score to begin with, due to a high credit utilization ratio, along with any recent late payments and/or late fees.

Tax Implications

Settling your debt involves debt forgiveness, which is considered taxable income by the IRS. You’ll likely need to pay income taxes on any amount the lender forgives. Some types of forgiven debt are exempted from taxation, however, so it is best to consult with a qualified, experienced tax advisor, Enrolled Agent (EA), or Certified Public Accountant (CPA) for advice regarding your particular situation.

Debt relief options like debt consolidation, debt management plans, and credit counseling don’t involve any forgiven debt, so there won’t be any tax implications.

What Is Debt Relief?

Debt relief refers to any financial strategy that helps lower your debt burden. It can involve creating a streamlined payment plan, reducing interest rates, waiving fees, or settling your debts for less than you owe. It includes strategies like nonprofit credit counseling, debt management plans (DMPs), debt consolidation, and debt settlement.

Debt relief may also include extreme measures, like bankruptcy, to help relieve some of the debts you owe. Bankruptcy may be a last resort option, but in some cases where you’ve tried every other debt relief alternative, it may be the only viable solution. Speak to a bankruptcy attorney to see if it’s right for you.  

Advantages of Debt Relief

  • Can lower interest rates
  • Can waive late fees and reduce penalty interest rates (of 30%) or more on credit cards
  • May help you save money now and in the future
  • May reduce the total amount you owe, now and in the future
  • Can help you pay off debts faster
  • May help you avoid bankruptcy and court judgments by resolving debts sooner rather than later

Disadvantages of Debt Relief

  • May lower your credit score significantly
  • Lenders aren’t obliged to accept your offers when you offer them
  • You may owe taxes on forgiven debt
  • May be difficult to qualify for some debt relief options if you have bad credit
  • Lenders may still decide to pursue legal action

What Is Debt Settlement?

Debt settlement involves negotiating with creditors and debt collectors to settle your account for less than you owe. If you have over $10,000 in unsecured debts, are struggling to keep up with debt payments, have late fees, and poor credit, this may be an option worth considering.

If you hire a debt settlement company to negotiate on your behalf, you may be able to save up to 50% of enrolled debts before fees. You’ll start making monthly payments in a separate savings account instead of to your lenders, so you can make a lump sum payment to settle your account.

Advantages of Debt Settlement

  • May reduce the total amount of debt you owe
  • May help you get out of debt sooner
  • May offer you potential savings of up to 50% of what you owe
  • Resolving debts may help you avoid legal action

Disadvantages of Debt Settlement

  • Can lower your credit score significantly
  • You’ll typically pay 15% of 25% of enrolled debts as a fee
  • You may owe taxes on forgiven debt
  • Lenders may not always accept your offer when you present it to them

Choose the Right Option To Manage Debt

When deciding between debt relief vs. debt settlement, it’s important to evaluate and keep a few factors in mind, such as how much you owe, types of debt, credit score, and income.

For example, if you owe a large amount of unsecured debt, debt settlement may be a cheaper way to get out of debt. It’s important to note that settlement programs aren’t available for secured debts, like auto loans and mortgages. However, if you still have a good credit history and want to simplify repayment, a debt relief option like a debt consolidation loan or 0% balance transfer credit card may be a better choice.

Brad Reichert, a debt expert and the founder and managing director of Reichert Asset Management LLC, offers the following advice to consumers trying to make a decision: “When it comes to evaluating the cost differences between debt settlement and other forms of debt relief, it’s usually best to look at your choices based on your current debt level and credit situation and the optimal outcome you want from pursuing solutions.”

Consider the points we’ve outlined below and speak to a professional to determine the right option for you.

Debt ReliefDebt Settlement
Can be used for smaller debt amounts.Ideal for unsecured debts of over $10,000.
Easier to qualify for some options if you have a good credit score.Suitable for those with bad credit.
Better option if you only want to simplify repayment and lower interest rates.Suitable for borrowers who can’t keep up with repayment and want to lower the amount they owe.

What To Look for in a Debt Relief or Settlement Company

While comparing debt relief vs. debt settlement is important, it’s also important to ensure that you choose the right company to work with. An experienced, trustworthy debt relief company can help you maximize your savings and make the entire process as stress-free as possible.

Here’s what to look for in a debt relief or settlement company:

  • Ensure the company is accredited and licensed.
  • Ask if they offer services in your state.
  • Read the company reviews on Better Business Bureau (BBB) and independent review sites like Trustpilot.
  • Avoid working with companies that ask for upfront payments or offer guarantees.
  • Ensure the company is transparent about its services and fees.