Debt resolution vs. debt consolidation

Few things in life are permanent, and that includes debt. It’s possible to turn your financial situation around, even if it feels terrible now. When you’re looking for a strategy for dealing with your debt, there are multiple options that largely depend on your circumstances. Your best path forward may not match someone else’s. 

Let’s explore two common debt solutions: debt resolution and debt consolidation. We’ll show you how each method works so you can decide if one is right for you. 

What you need to know about debt resolution

Debt resolution involves negotiating with creditors to accept less than the full amount you owe but consider it payment in full. Creditors may be willing to do this if you have a significant financial hardship and settling your debt is their best chance of getting paid. 

Anyone can negotiate with their creditors. If you're behind on payments or concerned you'll never get out from under your debt, you can call each creditor directly and ask to work out an agreement. 

Some people aren’t comfortable negotiating on their own. If you find the process overwhelming or stressful, you could work with a reputable debt resolution company who will talk to your creditors on your behalf. 

There are two ways to negotiate payment to resolve debt: a lump sum payment or a payment plan. 

Here are a couple of examples of how debt resolution could work:

Lump sum payment

Chris used a credit card to cover miscellaneous expenses after he got laid off from work. Although the balance was $5,000, it might as well have been $1 million as far as Chris was concerned. He got a new job but for a lower salary. His wife was unable to work due to a disability, and they had two children under the age of 10. Chris felt lost and scared and had no idea how long it would take to pay off the debt. So Chris called his creditor to explain the situation.  

The calls went back and forth a few times, and Chris had to provide some documentation, but by the time negotiations were finished, Chris’s creditor had agreed to accept a lump sum payment for much less than what he owed. In addition, the creditor agreed to waive all late fees and resolve the debt. 

Payment plan

Sam was seriously injured in a skiing accident. Even with basic health insurance, she was still left with substantial medical debt. Sam was unable to work, and so couldn’t pay anything toward the bill. Eventually, the hospital handed the bill off to its in-house bill collectors. 

Naturally, since Sam was unable to work, she fell behind on other bills and felt crushed by the stress of the situation. She turned to a debt resolution company for help. 

Negotiating on Sam's behalf, the debt resolution company worked with the hospital and got them to reduce the amount due. In addition, Sam went back to work and the hospital agreed to allow her to make regular monthly payments. Since Sam was enrolled in a debt resolution program, she contributed money every month to her dedicated program account. The debt resolution company negotiated with the creditor and made payments from Sam’s dedicated account. As long as Sam did her part, the hospital agreed to stop collection efforts. 

What you need to know about debt consolidation

Debt consolidation involves taking out a new loan to pay off more than one existing debt. Typically, the new loan has a lower interest rate and better terms than the existing debts. 

Debt consolidation is for someone who can afford to fully repay their debts but wants to save time or money or both. Generally, these are the benefits people enjoy by consolidating (but you don’t need to get them all to make consolidating a worthwhile strategy):

• Reduce the number of payments you have to make

• Lower the interest rate on your debt

• Lower your monthly payment

• Pay off debt faster than by making minimum payments

Debt consolidation example

Atlas feels as though they've fallen into a financial hole. They owe $3,000 on one credit card and $7,000 on another, and each card charges an annual percentage rate (APR) of 24.99%. Atlas’s current minimum monthly payments total $300. If Atlas continues paying $300 per month toward the debt, it will take nearly five years (58 months) to pay off the credit cards in full. Worse yet, they'll pay a whopping $7,244 in interest. 

Credit card required minimum payments get smaller as the balance goes down. Atlas’s budget was tight, and they were tempted to make smaller payments for budget relief as this happened. If Atlas goes that route, and pays a little less every month, it could take decades to pay off this debt. 

Fortunately, Atlas’s credit rating is high enough to qualify for a personal loan with an APR of 12%. Once the loan is approved, Atlas’s lender pays the creditors off directly. Atlas chooses a four-year repayment term, and the payment drops to $263. Atlas saves a lot in interest charges by consolidating. They will repay $2,640 in interest.

Comparing debt resolution and debt consolidation

When it comes to putting debt in the rearview mirror, there's no one-size-fits-all solution. For some, debt resolution is the best way forward. For others, it's debt consolidation. To compare the two, start by looking at the pros and cons of each. First, we look at debt resolution:

In a nutshell, debt resolution is for someone who is struggling and needs partial debt forgiveness.

Pros of debt resolution

• You could get rid of debt quicker than by making minimum payments.

• It's possible to get partial debt forgiveness.

• If you feel you lack negotiation skills, you could work with a professional debt resolution company and let them advocate for you.

• The amount of money you set aside each month toward debt resolution could be less than the total of the minimum payments you currently make. That could free up some room in your budget.

• Once you come to an agreement with a creditor, they may be willing to ease up on aggressive, stress-inducing collection calls and letters. Once you resolve a debt, that contact should stop entirely.

Cons of debt resolution

• Debt resolution doesn’t work for all kinds of debt.

• If you miss debt payments while you save funds for settlement offers, your credit standing is likely to suffer.

• Resolved debts could show up on your credit report as “settled.” That’s better than delinquent or in collections, but not as favorable as “paid as agreed.” 

Achieve isn't a credit repair organization and doesn't provide or offer services or advice to repair, modify, or improve your credit.

• Forgiven debt may be considered taxable income, unless you’re insolvent. Insolvent means what you owe is greater than what you own, and it’s calculated before you resolve your debts.

We provide general information but we’re not tax pros. Consult a qualified tax professional about your specific situation.

• If you choose to work with a professional debt resolution company, you’ll pay fees for their services.

• Creditors are not obligated to negotiate and could still try to collect the debt, including by filing a lawsuit against you.

Debt consolidation is for someone who can afford to fully repay their debt but wants to streamline it. 

Pros of debt consolidation

• Rather than multiple bills, you have a single monthly loan payment.

• You'll deal with a reduced number of creditors, which could make life a little easier. 

• You may save money if you qualify for a lower interest rate on the consolidation loan.

• Moving your debt from credit cards to an installment loan could have a positive impact on your credit standing if you avoid new credit card debt going forward.

• Making regular, on-time payments is a great way to build and maintain good credit.

• Because most consolidation loans have a fixed rate, you know exactly how much your payments are going to be each month. Credit cards (and some other debts) carry variable interest rates, meaning they can change without notice and are less predictable.

Cons of debt consolidation

• Debt consolidation doesn't reduce the amount you owe. Instead, it rearranges how it's repaid.

• If your debt problem is the amount of your monthly payment, you may find yourself extending the repayment period, which could result in paying more interest over time.  

• If you use a debt consolidation loan to pay off credit cards, there’s nothing to prevent you from using the cards to rack up balances again. It's 100% up to you to avoid new debt. 

• You may have to pay a fee for the new loan.

Debt resolution vs. debt consolidation: Which option is right for you?

The decision is solely yours. However, if your issue stems from high-interest debt but your credit score is high enough to land a debt consolidation loan with a lower interest rate, you may want to begin there. 

If your debt is unsecured and you’re already struggling, debt resolution may be realistic—especially if you’re suffering a significant financial hardship that is making it difficult to impossible to pay your minimums. 

No matter which way you're leaning, you could benefit from consulting with a debt expert—someone trained to look at your financial situation and recommend suitable solutions. Your personal circumstances are key when choosing between consolidation and resolution. 

Alternatives to debt resolution and debt consolidation

Debt resolution and consolidation aren't your only options when it comes to dealing with debt. Here are several alternatives to consolidation and resolution:

• Use a DIY debt payoff method, like the debt snowball or debt avalanche.

• Use a free debt paydown app to create a plan to pay off your debt.

• Borrow money from a close family member or friend, and then repay them in full over time. 

• Speak with an attorney regarding the pros and cons of bankruptcy. 

Anyone who's ever been in debt will agree that it's not fun. But there are ways to manage it so it doesn't haunt you forever. The trick is to consider all your options regarding your specific debt and choose the path most likely to have a positive impact. When it comes to getting rid of debt, no one method is a clear winner. It all depends on what's right for your situation. Once you've decided what that is, it's time to make a move.