Credit counseling vs. debt settlement

Choose which kind of help to get with your debt

Author pictureAuthor picture
Author picture
Written by
Author picture
Edited by
credit counselor talking to a client

Overwhelming debt can impact your life in so many negative ways: You may not get approved for a mortgage, your credit score might suffer, and large monthly payments could prevent you from saving for your future. Managing your debt and creating a plan to become debt-free helps you take back control. And while some people pay off debt on their own, others seek external help.

Credit counseling and debt settlement are two common methods of debt management. While they may seem the same at first glance, they’re actually quite different. Here's what you need to know to choose the best path toward your personal debt freedom.

Key insights

  • Credit counseling agencies provide free or low-cost consultation to help you understand your finances, create a budget and perhaps establish a debt management plan.
  • A debt management plan is an agreement between a debtor and their creditors. The debtor agrees to gradually pay off debts in exchange for reduced interest rates, waived fees and modified repayment terms.
  • Debt settlement is the act of negotiating with creditors to pay off debts for less than you owe.
  • Debt settlement tactics may include temporarily stopping debt payments to encourage creditors to negotiate, but this strategy can harm your credit.

How does credit counseling work?

Credit counseling involves meeting with a counselor to discuss your finances and learn how to better manage your money. Credit counseling agencies are usually nonprofit, and they typically offer a variety of personal finance services, including:

  • Developing a budget
  • Obtaining and reviewing your credit report
  • Money management education and workshops
  • Creating a debt management plan (DMP)

Counselors generally design DMPs to pay off your debt within five years or less.

Credit counseling costs

While some credit counseling services are available at no charge, you may have to pay for others, like a DMP.

The Uniform Debt-Management Services Act caps debt management fees at $79 per month, but some states set lower fee maximums. Many credit counseling organizations charge much less than the national maximum.

For instance, the average monthly fee for InCharge Debt Solutions is $33. American Consumer Credit Counseling charges a monthly maintenance fee of only $7 per creditor in a debt management plan (maximum $70 per month).

Pros and cons of credit counseling

Credit counseling is generally a good first step toward eliminating your debt. However, there are a few things to consider.


  • Get free counseling and education. You can usually discuss budgeting, debt management and other financial issues for free. Agencies may also offer educational materials and classes at no cost.
  • Make long-term lifestyle changes. Address the roots of your financial struggles and prevent them from happening again.
  • Negotiate with creditors. Your credit counselor may negotiate with your creditors to reduce interest rates and eliminate fees, which can help you get out of debt faster.


  • DMPs usually aren’t free. Credit counseling agencies typically charge for DMPs, although federal law caps the fees at $79 per month.
  • You still have to put in the work. Credit counselors give you the tools to create good money habits, but it’s up to you to follow their advice. You are still in charge of your financial decisions.
  • A lot of people don’t complete their DMPs. According to, only 55% to 70% of those who start a debt management plan will finish it.

How does debt settlement work?

Debt settlement may be a better option than credit counseling if your debt is so large that you won’t be able to repay the full amount, even with a reduced interest rate and waived fees.

Debt settlement companies work on your behalf to negotiate with creditors to reduce the amount of debt you’re obligated to repay. These negotiations may require you to pay a lump sum to settle the reduced balance, or you may be allowed to make small payments over time. In either situation, you may owe income tax on the forgiven debt.

One of the big differences between credit counseling and debt settlement is that debt settlement companies typically focus solely on reducing the amount of debt you’re required to repay. They usually do not provide workshops or budgeting tools to help you improve your financial habits.

Debt settlement costs

The cost of debt settlement varies by company, but most companies charge a fee of about 15% to 25% of your enrolled debt, i.e., the amount of debt the company tries to settle with creditors. With fees this high, plus a potential tax liability on the forgiven debt amount, you have to consider whether debt settlement is really worth it.

Keep in mind that the debt settlement industry is no stranger to scams. You should never agree to pay large fees until after a debt settlement company succeeds in settling one or more of your debts. And if you feel that it’s not worth it to pay a debt settlement company’s fees, you can always try to negotiate with creditors on your own instead.

» MORE: How to negotiate credit card debt

Pros and cons of debt settlement

Before pursuing debt settlement, you’ll want to weigh the pros and cons to determine whether it’s the best option for you.


  • Someone else deals with creditors. A debt settlement company will negotiate with creditors on your behalf. Hiring an experienced negotiator eliminates the stress of trying to negotiate on your own.
  • Your debt level could be slashed. Successful debt settlement can substantially reduce the amount of debt you’re obligated to repay. Some companies claim to reduce their clients’ debts by an average of 50%.
  • Avoid bankruptcy. Reducing your debt can give your monthly budget more breathing room and allow you to sidestep the drastic action of filing for bankruptcy.


  • High costs. You could pay up to 25% of your enrolled debt to the debt settlement company. You may also owe taxes on the amount of debt that’s forgiven.
  • Hit to credit score. A debt settlement company might ask you to stop making your regular payments to creditors during the negotiation process. Missed payments could lead to higher interest rates, accounts being turned over to collections and serious damage to your credit score.
  • Numerous scams. Be wary of debt settlement companies that pressure you to sign up immediately or demand upfront fees.

The difference between counseling and settlement

While credit counseling and debt settlement are two popular approaches to eliminating debt, there are significant differences between them.

Credit counseling is a more holistic approach that seeks to change financial behavior in the long run, while debt settlement focuses on resolving the immediate problem of overwhelming debt.

Credit counseling is a more holistic approach that seeks to change financial behavior in the long run, while debt settlement focuses on resolving the immediate problem of overwhelming debt.

When you work with a credit counselor, they give you money management tips, review your credit report and help you create a budget. If needed, counselors can also develop a DMP between you and your creditors so you can gradually pay off your debt.

Most credit counseling agencies are nonprofit, and any fees that they may charge are reasonable. In some cases, their services are available at no charge.

Debt settlement is generally provided by for-profit companies. Their fees are usually a percentage of the total debt they attempt to settle for you, which typically ends up being much higher than the fees charged by credit counselors. And with debt settlement, not only do you pay the company’s fees, but you may also owe taxes on the amount of debt that’s forgiven.

Keith L. Rucinski, a certified public accountant and the Chapter 13 bankruptcy trustee for Akron, Ohio, advised that debt settlement "requires the consumer to have sufficient funds to pay the settlement. Please remember that debt forgiven in bankruptcy has no income tax consequences for the consumer. However, debt forgiven in a settlement can result in the consumer owing tax on the debt forgiven."

Finally, the debt settlement industry is rife with scams, so finding a legitimate company to work with is critical. (You can start by checking out our ConsumerAffairs picks for the best debt settlement companies.)

» MORE: Debt settlement vs. bankruptcy

Which should you choose?

Deciding which strategy to use to eliminate your debt can be a challenge. Credit counseling is a better long-term strategy because it addresses both your immediate financial concerns and offers financial education to help you avoid future money mistakes. While you’ll repay all the money you owe with a DMP, the plan may result in reduced interest and eliminated fees for your debts.

Debt settlement is often seen as a last-ditch effort before filing bankruptcy. While debt settlement can help alleviate your immediate debt burden, it doesn’t address your fundamental financial habits. What’s more, the combination of the fees charged by a debt settlement company and the taxes you might owe on forgiven debts could minimize debt settlement’s net benefits. However, it can be a good choice if you work with a reputable company that charges relatively low fees and has a proven track record of negotiating large settlements.

Could your debt be reduced or forgiven? Take our financial relief quiz.


    Is debt settlement the same as a debt management plan?

    No, debt settlement is not the same as a debt management plan (DMP). Debt settlement entails negotiating with creditors to reduce the amount of debt you’re obligated to repay. It may result in tax liability and damage to your credit score. A DMP is a negotiated debt repayment plan in which creditors may agree to reduce your interest rates or waive fees. A DMP does not reduce the amount of debt you’re obligated to repay.

    Is debt settlement the same as debt consolidation?

    No, debt settlement is not the same as debt consolidation. Debt consolidation replaces your existing debt with new debt that has a lower interest rate or more favorable terms. You can consolidate with a debt consolidation loan or a balance transfer credit card. Debt settlement involves negotiating with creditors to reduce the amount of debt you’re required to repay.

    What percentage of debt can you settle?

    The amount of debt you can successfully settle will vary depending on the creditor, the amount owed, the debt’s age and your ability to repay. The amount of debt forgiven will need to be substantial to offset a debt settlement company’s fees, the increased taxes you might owe and the negative impact that settlement will likely have on your credit. Ideally, the debt settlement process should reduce your debt obligation by 50% or more.

    Is bankruptcy permanent?

    No, a bankruptcy filing usually stays on your credit report for seven to 10 years, depending on which chapter you file. Though a bankruptcy stays on your credit report for up to a decade, you should be able to obtain some form of new credit much sooner than that, as a bankruptcy’s impact on your credit score diminishes over time.

    Bottom line

    Getting out of debt sometimes requires expert assistance. Credit counseling agencies can help you budget your money and create a plan to gradually pay off your balances. Many credit counseling agencies offer free or low-cost services, allowing you to allocate more of your money toward reducing debt rather than paying fees.

    Debt settlement is a means of reducing debt by mutually agreeing with creditors to pay only a portion of what you owe. But it isn’t a free lunch. A company you enlist to negotiate a debt settlement agreement will usually charge substantial fees based on the total debt amount it negotiates. And keep in mind that debt settlement can have tax implications as well, since creditors may issue a Form 1099-C for the debt that’s forgiven.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau, " What is credit counseling? " Accessed March 28, 2023.
    2. InCharge Debt Solutions, " How Much Does A Debt Management Program Cost? " Accessed March 28, 2023.
    3. American Consumer Credit Counseling, " Debt Management Plan ." Accessed March 28, 2023.
    4. Money Management International, " How Much Can You Save with a Debt Management Plan? " Accessed March 28, 2023.
    5., “ Debt Management Plan: Pros, Cons and FAQs .” Accessed May 3, 2023.
    6. National Debt Relief, “ Top FAQs About The National Debt Relief Program .” Accessed May 3, 2023.
    7. InCharge Debt Solutions, " Debt Settlement ." Accessed March 28, 2023.
    8. Consolidated Credit, " Using a Debt Management Program ." Accessed March 28, 2023.
    9. Chase, " How long does bankruptcy stay on credit report? " Accessed March 29, 2023.
    Did you find this article helpful? |
    Share this article