Debt settlement vs. debt resolution: is one better than the other?

(Last Updated On: March 2, 2018)

Debts have become a way of life for most people. Different people choose different methods to manage and resolve their debts, depending upon their current financial status. You must have heard about friends opting for debt resolutions and debt settlements, and wondered if both are the same. There is a slight difference between the two, although their ulterior aims are the same – to reduce and resolve all outstanding debts. Off late, some people are using the terms interchangeably, but we cannot say that they mean the same.

Whether you opt for a debt settlement plan or a debt resolution plan, you will enjoy a few benefits, and you will have to face a few disadvantages. For example – debt settlement will help you get lowered interest rates and amicable payments, but the companies will require you to withhold monthly payments for a while till they negotiate better payment terms with your creditors. This can affect your credit score adversely. It can take almost a year to restore your FICO score to its former glory. Now, that is alright till you realize that even the loan prospects of your legally wedded spouse can suffer due to your poor credit scores.

Debt settlement: your way to lower payments

Settling a debt all by yourself is not impossible, especially if you have a little prior experience. DIY debt settlement is becoming very popular among American citizens since debt has become another common part of regular life. A DIY process involves a lot of research, risks and decision making. Therefore, a lot of people prefer sticking to a company or a lawyer for a smoother experience. These companies and lawyers deal with multiple debtors and their creditors. They have the experience necessary to negotiate favorable terms. In fact, a well-known veteran company may even have experience dealing with your debtors. This gives them an upper-hand during the negotiation process.

To begin any debt settlement, the company and lawyer will ask you to stop paying your monthly installments. You will need to make all the payments to a savings account that your company or your lawyer can access. Now, unless you can completely trust these companies or individuals, it is inadvisable to deposit cash into new savings accounts they can empty! Another risk you will always be taking is the direct hit on your credit score once you start missing your payments. These companies only pay your creditors when the amount in the savings account reaches the negotiated amount. It can take between 36 months to 60 months to pay your creditors off completely.

Debt resolution: a healthy debt payment process

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A debt resolution attorney will work with you to help you understand your finances. You need to chalk out a payment plan to be able to taste financial freedom. Once you have a blueprint of your savings, total payable and payment plan on the table, your attorney will contact all your creditors one by one for settling new payment terms. This can include the elimination of penalties, reduction of interest rates and new lowered payments for the outstanding debts. This is a lot like debt management and debt settlement, in this respect. However, in case of debt resolution, you need to complete current payments to mitigate the lawsuit risks and credit score risks. Debt resolution hardly has any negative effect on your credit score. Since you never stop paying them while your negotiation processes are already in motion, there is almost zero depreciating impact on your credit records. Additionally, if there are any legal matters associated with the debt and the payment process, your debt resolution attorney will address it.

The difference in cost

One main difference is the method of payment in each case. It is true that a debt settlement company takes its cut before the monthly payment goes to the creditor! The debt settlement companies and lawyers usually charge a fraction of the forgiven debt or a fraction of the payment. The debt resolution lawyers charge similar to other attorneys you have worked with. They work by a retainer and bill the extra hours once you exhaust the retainer. Looking back, debt resolution seems like the cheaper option. Debt settlement involves a lot of money as a fee, that could go into your own savings account or that you could use to pay off outstanding debts. Attorneys often have more experience and legal know-how, therefore the risks of working with them are much lesser, and you get to pay much lesser in total.

When a family is involved, why not try the more amicable options before you opt for debt settlement. All the ways to resolve debt have their niche sets of requirements, pros, and cons. However, you need to weigh each one of them and find the one that serves all your purposes while facilitating future loan opportunities.


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