Both options exist to help people who are struggling with debt, but they take very different approaches. Confusing the two can lead to a costly mistake, so it's worth understanding exactly how each one works before you sign up.

Credit counseling and debt management plans

A nonprofit credit counselor reviews your finances and, if appropriate, sets up a debt management plan: you make one monthly payment to the agency, which distributes it to your creditors, often at a reduced interest rate. You still pay back the full balance, just on better terms.

Debt settlement

A debt settlement company negotiates with creditors to accept less than the full balance owed, often after you stop making payments and instead save money in a dedicated account. This can reduce what you ultimately pay, but missed payments during the process damage your credit, and settled debt can be taxed as income.

Not every creditor agrees to settle

There's no guarantee a creditor will accept a settlement offer, and some may pursue collections or legal action while you're saving up for a settlement.
  • Credit counseling: fees are usually low, credit impact is minor, and you repay the full amount owed.
  • Debt settlement: potential for lower total payoff, but higher risk to your credit and possible tax consequences.