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Arrow with word Solution breaks word Debt.

People on websites like Avvo.com often ask questions about companies offering ‘debt consolidation,’ ‘debt management,’ ‘credit repair’ or ‘debt settlement.’ These questions are asked so frequently that I am writing this blog to share helpful information. Both consumers and companies use many of these terms interchangeably. Each term, however, refers to a specific type of debt resolution.

Unfortunately, when companies use ‘debt consolidation,’ ‘debt management,’ ‘credit repair’ or ‘debt settlement’ improperly or inconsistently in their advertisements, it makes it even more confusing. The information below can help clarify these different debt resolutions. This guide is for general information. Please contact an attorney for specific legal advice.

What is Debt Consolidation?

Debt consolidation is when a lender pays off all of your debts as a part of a loan to you. In return, you make payments to this lender. These type of loans are rare for most consumers. If you need a debt consolidation loan you may be behind on your payments to your credit cards or near the credit limit of your cards. Because folks needing debt consolidation loans likely have bad credit, they often will not qualify for an unsecured loan to pay off their debts. I generally do not recommend putting a home or vehicle up as collateral to pay off credit cards. That can get you into an even more difficult financial situation in the future if you’re not careful by putting you at risk of losing your home or your car because of those unpaid debts.

What is Debt Management?

Debt management is when a company (usually, but not always, a nonprofit organization) negotiates with your creditors to reduce fees and interest rates. You then make a monthly payment to the debt management company who in turn disburses those payments each month to the creditors participating in the plan. One such company is Money Management International. Creditors do not always agree to participate in these programs. A debt management company should let you know which creditors do not agree to participate.

What is Credit Repair?

Credit repair, in theory, is when a company disputes inaccurate information that appears on your credit reports. These companies tend to advertise to people with negative credit history and not to people with inaccurate credit history. The general rule of credit reporting is that creditors are not required to report anything. When creditors do report information, however, it must be truthful and accurate. Take, for example, a local advertisement that offers to remove a bankruptcy filing from your credit report. If you filed bankruptcy, then disputing the bankruptcy filing as an inaccurate item is unethical in my opinion.

Removing items from your credit report does nothing to resolve the underlying debts you owe or judgments that have been filed against you. You are still likely to receive letters, calls and even lawsuits from these creditors. I have had clients who struggled to create a complete list of creditors when they were preparing to file bankruptcy because they used a credit repair company and some items were removed by default (because the debt collectors failed to respond to the dispute). Accurate credit reports can also be helpful for knowing which debt collector to contact when you want to settle your debt.

If you have inaccurate items on your credit report (such as issues resulting from identity theft or a creditor misapplying a payment and showing you as late) I would encourage you to file a dispute yourself. Each major credit bureau has a link on its website explaining how to file a dispute. This is the same process that credit repair companies use, but you can follow this process on your own to make sure only truly inaccurate items are removed.


What is Debt Settlement?

Debt settlement is when a company saves up monthly payments that you give to them until there is enough money to try to negotiate a settlement with your creditors for less than what you owe. Creditors will often agree to reduced settlements when payment is made in a one-time lump sum form.

What are the common problems when using debt settlement companies?

  • The most common complaint I hear from people is that a debt settlement company made promises they could not keep or their advertising included misleading information.
  • There is no new government program that ‘entitles’ consumers, regardless of the total amount of their debts, to lower their credit card bills. Do not fall for this line commonly used in advertisements.
  • No company has a special legal tool that will force creditors to stop adding on interest and fees.
  • No company has a special legal tool that will force creditors to cease collection activities against you.
  • These companies usually have front-loaded contracts, which means it may be 6 months, 12 months or even longer before they have saved up enough of your money to begin making settlement offers to your creditors. In the meantime, there is a chance that one of more of your creditors will file a lawsuit against you since your debts are not being paid.

What should I look for when hiring a debt settlement company?

  • If the company is located in another state, are they licensed in Texas?
  • How much of your monthly payment goes to the debt settlement company’s fees?
  • When will settlement offers be made to your creditors?
  • Does your agreement cover what happens if you get sued during the process?

When is debt settlement more likely to work?

  • If you have a lump sum of money (possibly from a savings account, an inheritance or a small lottery winning), it may make sense to try to negotiate a settlement of your credit card debts.
  • If you have a lot of disposable income and can commit to saving a certain amount of money to put towards your credit cards each month, debt settlement may make sense for you.

If you want to hire someone to help you with debt settlement, I encourage you to meet with a local lawyer rather than hire an out of state company advertising online or on television. A local lawyer can provide more personalized information and will be more accessible. A lawyer can also provide legal advice to you (an out of state telephone operator is prohibited from providing legal advice).

Finally, here is a note from the Texas Attorney General with some of their thoughts on this topic.


Getting out of debt is a difficult road paved with pitfalls for the unwary. Do your homework before paying money to anyone. Make sure you understand the process you are agreeing to. Make sure you understand the dangers associated with the process and what your ‘plan B’ should be if the process you’ve chosen does not work.

The information contained in this blog is for general information and educational purposes and is not legal advice. Reading these posts does not create an attorney/client relationship.

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