Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan. Often it involves a secured loan against an asset that serves as collateral, most commonly a house.
Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.
Debt settlement is often confused with debt consolidation or debt management. In debt consolidation and debt management, the consumer makes monthly payments to the debt consolidator, who takes a fee and passes the rest on to the creditors; this way, creditors continue to receive payments each month. In debt settlement, the consumer makes monthly payments, out of which the debt settlement company takes its fees for the legal work or negotiation and payments are paid to the creditor.