Debt Management vs. Debt Settlement: Which Is Right for You?
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When you are in serious debt, desperation can sink in. Bills begin to pile up, and you begin to play the game of "which bill is most important to pay right now." If your debt is spiraling out of control, it may be time to get some outside help. From those offering to create a debt management plan to others claiming they can settle your debts at lower amounts, anything sounds appealing when the late notices flood the mailbox and debt collector calls carry on from 8 a.m. to 8 p.m. daily.
Here, we look at two options and how they compare so you can determine if one is better for your situation and help you get your runaway debt under control.
In this article
Types of debt reduction options
The three main debt reduction options are debt consolidation, debt management, and debt settlement. A debt consolidation loan combines all your outstanding debt into a single monthly payment, making it easier to track how much you spend on your debt each month. For example, you may sign up for a balance transfer card with better interest rates if you have credit card debt.
Debt management plans enable you to pay your debts off over a longer period by making reduced monthly payments every month. This option also makes it easier for you to track how much you spend on your debt each month, as it breaks up your payments into smaller amounts spread out during the extension of your plan.
Debt settlement involves negotiating with your creditors to settle your debts for less than the total amount you owe. If you have a significant amount of unsecured debt (debt that is not secured against property) and no assets that can be seized to pay off your debts, then this may be an option you may want to consider.
Debt management takeaways
Debt management involves bringing your debt load down to acceptable levels through budgeting and financial planning. This strategy is a proactive approach to reducing or eliminating your debt because you work to bring it down before it spirals out of control. These programs are offered by a nonprofit credit counseling agency, which should ideally be accredited by the National Foundation for Credit Counseling and have a certified credit counselor. These agencies can't help you with student loans or medical bills.
Debt management is a better option for you if:
- You have an emergency fund that will allow you to handle unexpected expenses without turning to additional sources of credit.
- You are comfortable using the services of a credit counselor who will help you create a budget, develop a savings plan, and make smart financial decisions.
- Depending on how much you make, you're open to the idea of a Chapter 7 bankruptcy or Chapter 13.
Related: Debt Consolidation vs. Bankruptcy
Debt settlement takeaways
A debt settlement company can help you negotiate lower payments with your creditors like credit card companies or arrange alternative arrangements so you can repay your debts more affordably and become debt-free. Compared to debt management, this is a reactive approach. You begin making payments once the creditor has accepted the settlement offer. In addition, there's a chance that you may be on the hook for income taxes on the forgiven debt.
You should consider the following factors when evaluating whether to use a debt management company to settle your debts:
- Reputation: Reputable debt relief companies will provide you with a written contract that spells out the terms of the arrangement and give you specific information about their services and fees. You should also check whether the company is a member of industry associations, such as the American Fair Credit Council or the Association for Financial Counseling and Planning Education.
- The qualifications of the company’s staff: The company should employ staff trained in financial planning. In addition, they should hold certifications from organizations that set ethical standards for the financial counseling industry.
- Fees charged: As with most businesses, some debt relief companies are better than others at negotiating settlements for their clients. However, you should not rely on a company’s "reputation" or "satisfaction rate" to determine which company is the best one to use. Instead, you should check the actual fees the company charges and compare these to those of other companies that offer similar services.
- Range of services offered: Some debt relief companies offer only debt settlement services, while others also provide credit counseling and budgeting advice. You may want to find a company that offers the full range of services you need.
- Track record: This is perhaps the most significant factor when selecting a debt settlement company. Many factors can affect the success of a debt settlement program, including the debtor's financial situation and the laws governing debt collection in a particular state. You should look for a company that is experienced in settling debts for clients in a similar situation to yours.
Although a debt relief company may be able to negotiate a reduction in the amount you owe, you should only consider using this service as a last resort. This is because these companies will charge you a fee for their services, and the amount of your negotiated settlement will probably be smaller than it would have been if you had settled your debt on your own. In addition, the industry is rampant with scams.
Moreover, there is no guarantee that you will actually be able to settle your debt for a lower amount than you owe. Therefore, you should consider the debt settlement option only if you have already explored all other alternatives and can still not reduce your debt on your own.
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Comparing debt management and debt settlement
- Debt management companies arrange lower monthly repayments on your debt and report the payments to a credit bureau to help you maintain a good credit rating over time. Your credit report will reflect these payments and count toward your credit score. As a result, lenders will give you better terms on a new loan in the future, like lower interest rates and a lower monthly payment.
- Debt management companies do not negotiate directly with creditors like a debt settlement or debt relief company; they cannot make calls or send emails on your behalf. You will likely need to use the services of a solicitor to negotiate a settlement with your creditors if you choose to use a debt settlement company instead.
- Debt settlement companies contact all your creditors and convince them to agree to a reduced payment for your outstanding debt in exchange for a lump sum of cash from you. This lump sum is then used to settle your debts in full.
- With a debt management plan, you will usually be required to make a minimum repayment of at least $50 per month towards your debt over a set period. With debt settlement, you will be expected to pay at least 40% of your remaining debt to settle it in full. However, if you have a large amount of unsecured debt and no assets that can be used to repay it, you may be required to pay a larger amount to settle your debts in full.
- You are generally required to remain in contact with a debt management company for as long as they have an ongoing agreement with you. Depending on your chosen plan, this can be either a year or three. With debt settlement, you will need to remain in regular contact with your adviser on an ongoing basis until you have settled all of your debts.
- If you owe money on unsecured debts that cannot be recovered from any assets you own, you may achieve a better result with a debt settlement company than you could with a debt management company. This is because a debt settlement company can negotiate with your creditors directly, while a debt management company cannot do this.
- A debt management company can provide you with information about all the options available in settling your debts before you agree to go ahead with their service. This allows you to make a fully informed decision about the type of service you wish to use and ensures that you choose the best option for your needs.
Pros and cons
There are many advantages of using the services of a debt settlement company to settle your debts if you have a large amount of unsecured debt that you cannot repay. These include helping you get a better result by negotiating directly with your lender on your behalf, and, in most cases, their consultation will be free.
A disadvantage of using a debt settlement company is that they usually take a commission on the total debt they save you on your outstanding debts. This means you will pay them for their service even after all your debts have been paid in full. This may be unacceptable if you prefer to pay for a service only once it has been completed.
It is, therefore, up to you to decide whether the advantages of using the services provided by a debt settlement company outweigh the disadvantages or whether you prefer to use a debt management company instead.
Make a commitment to get out of debt with a dedicated team that will support you every step of the way, providing you with the necessary resources and assistance to achieve financial freedom. You’ll get the help you need without paying any fees for our services until your debts are reduced and you save money.
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The bottom line
Not all debt relief options are equal. There are a variety of ways in which you can get rid of your debts and get back in control of your finances. Suppose you are struggling with your debts and feel that your situation is becoming unsustainable. In that case, you should act quickly to get some help and advice from a reputable debt advisor who can help you to get your debt situation under control. There are several different options for dealing with your debts, including debt management and debt settlement.
A debt management program can be a faster way to eliminate all your debts, whereas debt settlement can take many months or even years. The most important thing to do when you have debt is to find the right solution for your circumstances that can help you to get out of debt more quickly. There are many different options available, and you should therefore take the time to research before deciding which one is right for you.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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