- Missed payments are usually part of the process. That can seriously damage your credit
- Interest and fees may keep growing until an account is settled
- Not every creditor will negotiate. Some debts are harder to settle than others
If you’re trying to get out from under credit card balances, medical bills, or other unsecured debt, two terms come up quickly: debt settlement and credit counseling .
They can sound similar, but they work very differently, and the right choice depends on your budget, your credit profile, and how much risk you’re willing to take on.
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This guide breaks down what each option does, what it costs, and the situations where one may make more sense than the other. If you’re comparing debt relief options for the first time, start here.
What debt settlement is designed to do
Debt settlement is a negotiation process. In a typical setup, you stop paying creditors directly and instead make monthly deposits into a dedicated account while the settlement company negotiates with creditors to accept less than the full balance.
The appeal is straightforward: if a creditor agrees to settle, you may resolve an account for less than you originally owed. But that potential upside comes with real tradeoffs.
- Missed payments are usually part of the process. That can seriously damage your credit.
- Interest and fees may keep growing until an account is settled.
- Not every creditor will negotiate. Some debts are harder to settle than others.
- Taxes can be a factor. In some cases, forgiven debt may be treated as taxable income.
We go deeper on this in this rundown — worth a read before you decide anything.
Debt settlement is generally considered a more aggressive option. It may be worth exploring if you are already behind, have several unsecured debts, and are looking for a path that could reduce what you owe.
It is usually not the best fit if you can still keep up with minimum payments and want to protect your credit as much as possible.
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How credit counseling works instead
Credit counseling is often a better-known, lower-risk starting point. A nonprofit credit counseling agency can review your budget, talk through your debts, and help you decide whether a debt management plan makes sense.
Under a debt management plan, you make one monthly payment to the agency, and the agency pays your participating creditors. The agency may also work to lower interest rates or waive certain fees, depending on the creditor and your circumstances.
Unlike debt settlement, credit counseling does not usually aim to reduce the principal balance. Instead, it helps you repay what you owe more efficiently and with more structure.
Sources & further reading
- Consumer Financial Protection Bureau (CFPB)
- Federal Trade Commission — Credit & Debt
- MyMoney.gov — U.S. Financial Literacy
- Internal Revenue Service (IRS)
This article is for general information only and is not professional financial, legal, or medical advice.
Dana Whitfield — Personal Finance Editor
Dana has spent more than a decade writing about consumer debt, credit, and everyday money decisions, translating dense policy and lender fine print into plain-English steps readers can actually use. Every figure here is checked against current federal and lender guidance.
✓ Reviewed for accuracy by Marcus Reed, Accredited Financial Counselor · Updated August 2026
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