If you’re struggling with your debt, there is hope. Credit counseling agencies and debt resolution programs are available to help you get some relief and a new start. But what are the differences between debt management vs. debt settlement? The answer can help you decide which is the better approach for you.
What is debt management?
A debt management plan is a type of repayment plan you can do through a credit counseling agency. These plans typically take three to five years to complete and usually include credit card debt and other unsecured debts.
Under a debt management plan, you make just one monthly payment to the credit counseling agency. The agency then divvies up your payment and distributes it to your individual creditors.
Credit counselors can negotiate on your behalf to get you lower interest rates and monthly payments in many cases. They may also get creditors to re-age your debt, which turns a delinquent account into a current one. This process can also wipe out your late fees.
Debt management is a good option for a few reasons:
- It can reduce your overall costs.
- You won’t have to deal with your creditors directly.
- It simplifies everything into one payment.
- It doesn’t damage your credit score significantly (if you already had late payments, though, those won’t get erased).
That said, here are some other things to consider:
- You’ll typically pay an upfront fee of about $75 and a monthly fee of $20 to $30.
- There will be a notation on your credit report, which lenders can view.
- You may be required to close your credit cards.
- Miss a payment, and you could lose your chance for better terms.
- Your creditors may not choose to participate.
Debt management is typically best when you’re not yet behind on your payments, or you’ve just started missing some. It’s also important to determine whether you can afford the monthly payments required by the credit counseling agency.
If you’re considering a debt management plan, make sure to go with a nonprofit agency. You can search for one in your area through the National Foundation for Credit Counseling.
What is debt settlement?
Debt settlement, also sometimes called a debt resolution program, allows you to get rid of your debt for less than you owe. You can enlist the help of a law firm or settlement company to work to negotiate on your behalf.
With debt settlement, you typically stop making all the payments on the debts you want to include in the settlement. Instead, you’ll make payments into an account with the firm or company that’s helping you. Once that account reaches a balance they can negotiate with, they’ll start that process.
Depending on the situation, you could save hundreds or even thousands of dollars with a debt settlement.
Some of the pros of debt settlement include:
- You can save money.
- You won’t have to deal with your creditors directly.
- It can help you avoid bankruptcy.
- It can put you in a better financial position in the long run.
That said, there are some potential pitfalls to keep an eye on:
- It can temporarily harm your credit.
- Your creditors may not choose to negotiate if you try to settle the debt by yourself or not work with an experienced professional.
- You’ll typically pay a fee to the firm or company for the debt settlement management.
- The forgiven debt may be considered taxable income.
In general, it’s best to consider debt settlement if you’re severely delinquent on your loans or credit cards and want to avoid bankruptcy. In this event, most of the credit damage has already been done, and you can avoid the worse credit problems bankruptcy brings with it.
Debt management plan vs. debt relief: Which is right for you?
It’s important to understand your situation before you decide what to do with your debt. While debt relief through a settlement can be effective, the credit problems it can cause may not be worth it unless you’re already well behind.
Debt management can also be a good approach, but it may not be the best strategy if you don’t think you can keep up with the payments.
Consider consulting with an attorney or financial professional to determine which path is best for you. For example, Tayne Law Group offers a free consultation, so you don’t have to worry about paying until you make a decision.
In other words, if you’re comparing debt settlement vs. debt management, it’s not about which one is better overall. Rather, it’s which one is better for you.
