Credit counseling helps you repay your debt in full, sometimes at a lower interest rate through a debt management plan (DMP). Debt settlement tries to get the companies you owe to accept less than the full balance. The right option depends on whether repaying the full balance is realistic for you.
Comparing Credit Counseling vs. Debt Settlement
| Credit Counseling | Debt Settlement | |
|---|---|---|
| Best for | People with steady income who can repay what they owe with some help, like a budget or a lower interest rate through a debt management plan (DMP) | People dealing with financial hardship who can't realistically repay their full balances |
| Who runs it | A credit counseling agency, usually a nonprofit | A debt settlement company, like ClearOne Advantage |
| Your balance | You repay the full amount | The companies you owe may accept less than the full balance |
| What gets lowered | With a DMP: interest rates and some fees, if the companies you owe agree | The balance on each account that settles |
| How you pay | With a DMP: usually a monthly fee, and sometimes a setup fee | With ClearOne Advantage: no upfront fees. The fee is a percentage of the debt you enroll. It's collected only after a settlement is reached, you approve it, and at least one payment is made toward it. |
| Commitment | With a DMP: one monthly payment to the agency, usually for three to five years. On your own: you follow the plan you built with your counselor and keep paying the companies you owe directly. | You make a monthly plan payment into a dedicated savings account and approve each settlement. How long it takes depends on how much you owe and how quickly you save. |
| Cost | With a DMP: there may be a small setup fee, along with monthly fees. Many states cap costs. | A percentage of the debt you enroll. The exact percentage varies by person. |
| Credit impact | Meeting with a counselor won't affect your score. With a DMP, closing the cards on the plan can lower it. The companies you owe may also note the plan on your credit report, where future lenders can see it. | Will have a negative impact on your credit score |
| Tax implication | Usually none | Forgiven debt may count as taxable income |
Learn more about credit counseling and debt management plans.
Credit Counseling or Debt Settlement: Which Is Better for You?
Start with what's making your debt hard to pay. If it's mostly high interest or too many bills to keep track of, credit counseling may be enough. If the balance itself isn't realistic to repay in full, debt settlement may be worth a look.
Credit counseling may fit if:
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You have steady income and can manage your current payments. With a DMP, a lower interest rate could be enough to make them work.
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You want help building a budget and a plan for your debt.
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You'd rather skip a DMP, and you're organized enough to stick to the plan you build with your counselor on your own.
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You're considering a DMP, and you're OK closing your cards while you're on it.
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Limiting the effect on your credit matters most, for example because you're planning to apply for a mortgage or car loan.
You may consider debt settlement if:
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Your income has dropped after a job loss, a medical emergency, or a divorce, and repaying the full balance isn't realistic.
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You've already fallen behind on payments, and a lower interest rate wouldn't be enough to catch up.
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A large share of your income goes to debt payments. Your debt-to-income ratio can help you see how much.
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You've tried a debt management plan, or you don't qualify for a debt consolidation loan, and you still can't keep up.
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You have at least $10,000 in unsecured debt, and you're prepared for a negative impact on your credit score.
How Credit Counseling Works
If you're struggling with debt, credit counseling can help you see the full picture. A counselor, usually from a nonprofit agency, walks through your finances with you and explains how interest and fees are adding to what you owe. Then they help you build a plan to pay it down. Here's what that usually looks like:
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You meet with a credit counselor. You'll go over what you earn, what you spend, and what you owe, and talk through what's been hardest to keep up with. Meeting with a counselor won't affect your credit score.
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You get a personalized plan you follow on your own. For many people, the session ends here. The counselor helps you build a budget and a plan for paying down your debt that fits your situation. You carry it out yourself and keep paying the companies you owe directly. Many agencies also offer free classes and materials on budgeting and managing debt.
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You may be offered a debt management plan. If paying on your own isn't realistic, the counselor may suggest a debt management plan (DMP). This is a formal program the agency runs for you. You make one monthly payment to the agency, and it pays each company you owe. Those companies may agree to lower your interest rate or waive some fees, but they don't have to. Either way, you still repay the full balance.
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A DMP gives you structure, but it's a commitment. You get a set monthly payment and an agency keeping you on track until the debts on your plan are paid off. Most plans take three to five years. You'll usually need to close the credit cards on the plan, and you may have to agree not to open new credit while you're on it. Agencies typically charge a monthly fee.
ClearOne Advantage doesn't offer credit counseling or debt management plans. If this sounds like the right fit, read more about how credit counseling works.
How Debt Settlement Works
Debt settlement works differently. Instead of lowering your interest rate, it tries to get the companies you owe to accept less than the full balance. It's usually for unsecured debt (debt that isn't backed by a house or car), like credit cards and personal loans. It may be worth considering if you've fallen behind and paying the full balance isn't realistic.
Here's how it generally works with any debt settlement company:
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You save instead of paying your enrolled accounts. You make monthly deposits into a dedicated account while those accounts fall behind. The further behind an account gets, the more willing the company you owe may be to accept less. Falling behind will have a negative impact on your credit score. Until an account is settled, fees and interest can add up, and collections or a lawsuit are possible.
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The company negotiates once there's enough saved. It works with each company you owe to try to settle the account for less than the full balance.
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Settlements are paid one account at a time. Once you agree to a settlement, it's paid from your savings, and that account is resolved. The company keeps working through your other enrolled accounts, negotiating each one as your savings build.
How it works with ClearOne Advantage
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Start with a free debt analysis. A Certified Debt Specialist reviews your debts, income, and budget with you. You'll need at least $10,000 in unsecured debt to enroll.
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Make one monthly plan payment. It goes into a dedicated FDIC-insured savings account in your name.
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We work directly with the companies you owe. Once enough is saved, we negotiate on each enrolled account.
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You approve every settlement. Nothing is settled until you say yes.
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No upfront fees. Our fee is earned only after a settlement is reached, you approve it, and at least one payment is made toward it.
Pros and Cons of Credit Counseling
Credit counseling tends to work best if you have steady income and you're open to changing how you spend. Here's what you gain and what you give up:
Pros of credit counseling
Lower interest and fees. On a debt management plan, the companies you owe may lower your interest rate or waive late fees. That means more of each payment goes toward your principal balance.
One payment instead of many. With a DMP, you pay the agency once a month, and it pays each company you owe.
Help building better habits. A counselor helps you build a budget and find places to cut back. Many agencies also offer free classes on managing money and debt.
Structure, with or without a DMP. On a DMP, you get a set payment schedule and an agency keeping you on track. Without a DMP, you leave with a budget and a clear plan to follow, and many agencies offer follow-up sessions if you want to check in.
Fewer collection calls. Once a DMP is in place, the companies on your plan may stop collection calls. If they do call, you can ask them to contact your credit counseling agency instead.
No new loan to qualify for. Unlike a debt consolidation loan, a DMP doesn't require a certain credit score or debt-to-income ratio (the share of your monthly income that goes to debt payments). You keep your existing debts and pay them down through the agency.
Cons of credit counseling
You still repay the full balance. A DMP may lower what you pay in interest, but not your principal (the amount you originally borrowed or charged).
A DMP is a long commitment. Most plans take three to five years of steady monthly payments.
Without a DMP, it's up to you. If you get advice only, the counselor helps you build a budget and a plan, but you're the one who has to stick to it. No one is making your payments or keeping you on schedule.
You'll likely close your cards. With a DMP, you may have to close some credit cards. Closing cards on the plan can lower your credit score by raising your credit utilization (how much of your available credit you're using). You may also have to agree not to open new credit, and future lenders may see that you're on a DMP.
The companies you owe don't have to agree. They may not lower your rate or waive fees.
There are fees. Most plans charge a monthly fee and sometimes a setup fee. Nonprofit agencies are required to offer a waiver if you can't afford them.
It may not be enough. If you've lost income, or your payments are already more than your budget can handle, a DMP may not lower them enough to help.
Pros & Cons of Debt Settlement
Debt settlement tends to fit if you've already fallen behind and repaying the full balance isn't realistic, even at a lower interest rate. This often happens after a change in your circumstances, like a job loss, a medical emergency, or a divorce. Here's what you gain and what you give up:
Pros of debt settlement
You may pay back less than you owe. The companies you owe may agree to settle for less than the full balance. A DMP, by comparison, may only lower the interest.
One monthly plan payment. You make one deposit a month into a dedicated savings account instead of juggling several bills.
No new loan. Unlike a debt consolidation loan, you're not borrowing money to pay off debt, and you don't need strong enough credit to qualify for a lower interest rate.
An alternative to bankruptcy. For some people, it's a way to deal with debt they can't repay without going to court.
No upfront fees. Under FTC rules, a debt settlement company can't collect its fee before it settles one of your debts. The FTC warns that "only scammers will try to collect fees from you before they settle any of your debts." With ClearOne Advantage, the fee is collected only after a settlement is reached, you approve it, and at least one payment is made toward it.
Guidance along the way. A reputable debt settlement company should review your finances before you enroll, and some also offer budgeting tools or educational resources. At ClearOne Advantage, it starts with a free debt analysis, where a Certified Debt Specialist goes over your budget and income with you. After that, our team is there to answer questions and help you make sound decisions throughout the program.
Cons of debt settlement
Your credit will take a hit. Your accounts fall behind while you save, and that will have a negative impact on your credit score.
Your balances can grow before they settle. Late fees and interest can keep adding up until each account is settled.
Collections and lawsuits are possible. The companies you owe may keep trying to collect, and in some cases they may sue.
Not every creditor agrees to settle. Some companies you owe may refuse to negotiate.
It's a long game. You'll need to keep up your monthly deposits the whole time you're in the program, and each account is settled only once there's enough saved for it. How long it takes depends on how much you owe and how quickly you save.
There's a fee. You pay a percentage of the debt you enroll, on top of what you pay the companies you owe.
Forgiven debt may be taxable. If part of your debt is forgiven, that amount may count as income. The IRS explains the rules and exceptions.
Not everyone finishes. Your results depend on making your plan payments as agreed.
Related: The Pros and Cons of Debt Settlement
What About Other Options?
Credit counseling and debt settlement aren't the only ways to deal with debt. Depending on your credit and how far behind you are, one of these might fit better:
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A debt consolidation loan. You take out a new loan from a lender to pay off your balances, ideally at a lower interest rate. You'll usually need good enough credit to get a rate lower than what you pay now. ClearOne Advantage isn't a lender and doesn't offer loans. Learn how debt consolidation works.
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Bankruptcy. Bankruptcy is a legal process, usually handled with a bankruptcy attorney. Depending on the type you file, it can wipe out (discharge) some debts or set up a court-approved repayment plan. It's public record and stays on your credit report for years. Learn more about bankruptcy.
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Working it out on your own. You can ask a company you owe for a hardship plan, or ask it to accept less than the full balance. It doesn't have to say yes. If it does, get the agreement in writing before you pay. If you stop paying while you negotiate, fees and interest can add up, your credit can take a hit, and collectors may contact you.
For a side-by-side look at all of these, see the best debt relief options.
How to Choose, and How ClearOne Advantage Can Help
Whichever path you take, check out who you're working with before you sign anything.
If you're considering credit counseling:
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Look for a nonprofit agency that belongs to the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Its counselors should be certified by an outside organization.
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Ask about fees and get them in writing before you sign up.
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Be careful with any agency that pushes a debt management plan as your only option.
If you're considering debt settlement, ask any company:
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Do you charge any fees before you settle a debt?
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How is your fee calculated, and when is it collected?
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Will I approve each settlement before it's paid?
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What happens to my credit and my accounts while I'm saving?
Talk It Through with ClearOne Advantage
ClearOne Advantage has an A+ rating with the Better Business Bureau and a 4.8 rating on Trustpilot from 10,000+ reviews. In a free debt analysis, a Certified Debt Specialist goes over your debts, income, and budget with you. They'll answer those questions and help you see whether debt settlement fits your situation. Inquiring is free and won't impact your credit.
