If you are struggling with debt you may be wondering: what’s the difference between debt settlement and debt management to pay off debt? On the surface they may seem similar, but in reality,they’re very different.
Understanding Your Debt Relief Options
There are a lot of options out there when looking for debt relief. Debt settlement, debt management plans, handling it on your own, and bankruptcy are all different options with advantages and disadvantages for each unique financial situation. We’ll help explain the difference between debt settlement and debt management – two options you may be exploring.
Debt Management Plan Overview
A Debt Management Plan (DMP) is a program designed to help pay off unsecured debts with the help of a non-profit credit counseling agency. Examples of unsecured debts covered in a DMP include:
- Credit cards
- Collection accounts
- Medical bills
- Personal loans
- Department store cards
- Repossessions
On a DMP, your enrolled unsecured debts are consolidated into one monthly payment made to the credit counseling agency who then pays each of your creditors on your behalf.
Enrolling in a DMP with a credit counseling agency can help you gain control of your finances without incurring more debt. The benefits of a DMP may include:
- One affordable monthly payment
- Waived late and over-the-limit fees
- Lower interest rates
- Pay off debt much faster than on their own paying minimum payments
- Credit reports will show the account was paid in full
- Eliminating collection calls
- Ongoing financial education and support
Why choose Debt Management?
A Debt Management Plan may be right for you if:
- You have credit card or other unsecured debt.
- You have more debt than you can handle on your own.
- You are paying high interest rates.
- Your credit score doesn’t qualify you for a balance transfer or personal loan to handle your debt.
- You don’t want to keep adding to your credit card balances.
- You don’t feel prepared to manage paying off debt without assistance.
Debt Settlement Overview
With Debt Settlement, you withhold payments to your creditor(s) until your account is significantly delinquent (usually more than 90 days) and then ask the creditor to accept a smaller amount instead of the full payment. It’s not uncommon for a creditor to accept a lesser payment since they may not get any payment from a delinquent account.
While that might sound appealing, debt settlement has several downsides:
- Settlement harms your credit score because you are not paying the total amount of the debt. Typically with debt settlement, consumers will pay 50% or more of the balance.
- Your credit reports will indicate a settled debt instead of full payment.
- Creditors will not receive monthly payments while a settlement is being negotiated, and each late payment is reported to the three major credit bureaus and stays on the credit report for up to seven years.
- You may receive a high amount of collection calls and letters and could risk being sued by your creditors for non-payment.
- If the debt is settled for less than the full balance, there may be tax implications because the portion of the debt that is forgiven is likely to be reported to the IRS as income.
- Debt Settlement companies often charge high fees for this service. You could pay as much as 15% to 25% of the amount settled.
You can attempt to settle your debts on your own, or you can hire a debt settlement company, which comes with further risk. Many Debt Settlement companies have been accused of taking fees from consumers and providing little benefit.
Why choose Debt Settlement?
Debt Settlement could be right for you if:
- You have accounts that are already severely delinquent or in collections
- There is already significant damage to your credit score because of late payments
- You are willing to pay fees to a company to settle your debt
- You are willing to accept the future tax implications
When you’re looking for a solution for your debt, it’s important to understand the difference between debt settlement and debt management so you can make the solution that is healthiest for your financial future.
If you are experiencing financial difficulty and are looking for a solution, non-profit credit counseling can help you make sense of all your options. Contact us today for a free financial assessment with one of our certified credit counselors.
