debt consolidation vs debt settlement

This is a common question for those in the market to find a way to eliminate their debt.  While they sound like the same thing, they really differ quite greatly.  On top of that both are not always available to every person.  To determine what is your best option first we should understand their definitions.

Debt consolidation is when you take out a new loan and in essense move all of your remaining debt (or at least the portion that isn't tied to a home or in some instances a vehicle) to that loan. This new loan will be much larger in total than any of the other loans, obviously, but also carries with it lower minimum payments in general and often times a better rate. If the consolidation loan is a home equity loan the interest is also even tax deductible. In order to go with the debt consolidation route you need to have a sufficiently good credit score and a way to secure a large enough loan for all your debt. Tapping into your homes equity is a good example of an affordable debt consolidation loan.

Debt settlement entails contacting current debt holding companies and negotiating with them to lower your interest rates (or sometimes removing interest entirely) as well as often times forgiving a portion of the amount of debt payable.  Usually debt settlement is taken as a task when a person or business has become delinquent on their payments.  This gives the creditors a reason to believe that settlement is in their best interest.  It does not have to be that way, however.  Anyone can undertake some debt settlement it just becomes a game of finding a lever to get the creditors to loosen their terms.

So what is the best course for you to take? There obviously are many facets of each undertaking so boiling it down to figure out which is the most prudent action to take is not completely trivial. Let's look at the pros and cons of each option.

Pros and cons of debt consolidation:
Pros:
Simplify your debt position - turns your number of creditors to one central company
Lower rate - often it is possible to find a lower rate for your entire debt picture than the sum of its current parts
Lower monthly payment - often times consolidating several loans into one will allow for a lower monthly payment based upon the minimum payments required of several loans vs one
Cons:
Loan payoff length increases - invariably the lower payment realized above comes with it a longer term
More interest paid - via the longer loan term the interest paid increases also
Doesn't address cause - consolidating the loans into one large loan does not remedy the way the debt accrued over time and could lead to the same problem resurfacing.

Pros and cons of debt settlement:
Pros:
Lower payments - Via relieving debt and lowering or eliminating interest rates you will indeed have lower monthly payment
Legal and debt collection stop - once you get your settlement in writing the debt collection agencies and legal actions will cease
Cons:
Credit score is decimated - much the same way a bankruptcy does a number on your credit score, debt settlement where you forgive debt will assuredly lower your credit score precipitously .  This will lead to higher rates on any subsequent credit requests in the following few years.
Forgiven debt is taxable - whatever debt is forgiven is reported to the IRS and you will pay federal and state taxes.  This will vary depending on your income level and tax situation, contact a tax advisor for more information.
Substantial fees from debt settlement companies - if you decide to go about debt settlement with a company that does the work for you be wary of exorbinant fees.  They do have to make money for their work, but often times they sneak in hidden fees and the like to really gouge you.