There are a number of options out there to help you manage and pay off your debt, but it can definitely be a challenge to figure out which one is right for you. Debt management and debt settlement are two options that sound similar, but are in fact quite different.
Let’s take a look at debt management vs debt settlement. They each have their benefits and drawbacks, and when you understand these options better, you can make more informed choices about how to pay off your debt.
Debt management programs or plans combine multiple debts into one single monthly payment. This payment will have a lower interest rate than you were paying before, and the monthly minimum payment will be lower as well. Payment plans will usually last three to five years
Debt management plans are available through trustworthy credit counseling agencies, who will work with you to set up the monthly payment. The credit counseling agency will negotiate with your creditors directly for lower interest rates, lower monthly payments, and lower fees. They may also help you create a budget and provide financial coaching to help you make your payments. Because you pay off your principal debt, your credit score is not generally negatively affected by debt management.
Why Choose Debt Management?
Whether or not you choose debt management or debt settlement to pay off your debts depends on your situation. Debt management is a good choice if you:
- Primarily have credit card debt
- Don’t qualify for a personal loan or balance transfer credit card because of a poor credit score
- Have more debt than you can handle through debt consolidation
- Need help from a professional in creating a plan to manage your money and pay off debts
Drawbacks of Debt Management
Even though a debt management plan can be helpful in paying off debt, it has a number of drawbacks, including:
- If you miss a payment, you will be removed from your program and find yourself back in your former situation. People who can’t make regular monthly payments may struggle.
- You will have to close all of your credit card accounts.
- Debt management programs are designed to be repaid in three to five years. Some people have so much debt that, even with reduced interest rates, they can’t pay it back in that time frame.
- Debt management plans work with credit card debt and don’t help with other forms of debt, including personal loans, medical bills, and student loans.
Debt settlement is a method of reducing the amount of debt you owe, and you can do it on your own or work with a debt settlement company negotiating on your behalf. Basically, if you decide that your debts are too overwhelming and beyond your ability to pay, even with consolidation or debt management, your creditors can agree to accept a smaller amount in full satisfaction of the debt.
The idea is that creditors will make the best of a bad situation and accept less money, rather than no money.
Debt settlement is appealing because it resolves your debt for a fraction of what you owe.
Why Choose Debt Settlement?
Damage to your credit score is a definite drawback to debt settlement. On the other hand, if your debts are large and your accounts are already severely delinquent or have gone to collections, your credit score is already suffering. In that situation, debt settlement can help reduce what you owe.
Another benefit of debt settlement is that you don’t necessarily have to work with the collection agency or creditors directly. An experienced debt settlement company will handle that for you; you will pay them directly and not have to work with a collection agency.
Drawbacks of Debt Settlement
Debt settlement can be a good option in certain situations, but keep these drawbacks in mind:
- Damage to your credit score
- Risk of being sued by the creditor
- It’s possible that the creditor won’t agree to settle
- Any forgiven debt may be considered taxable income
Navigating the ins and outs of paying off debt, including debt management vs debt settlement, can be confusing. CreditAnswers offers information and solutions for debt relief—learn more about how CreditAnswers can help.