According to the Federal Reserve Bank of New York, household debt now totals $16.90 trillion, $986 billion of which is on credit cards.
If your debts are causing you serious stress, you must take action. Debt settlement and Debt Management Plans are two of your leading options for dealing with unsecured debts like credit card debt, medical debt, personal loans, and private student loans.
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Our take
- Debt settlement works with most unsecured debts
- Debt Management Plans are run by credit counselors who typically deal exclusively with credit card debt
- Both require making a single monthly payment to the company or agency you hire
- Both typically require closing your accounts once you’ve paid your settlements
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Choosing the best option
Debt Management Plans and debt settlement use different approaches to pay off unsecured debts, but there are also a few key similarities.
- Debt Management Plans are typically run by nonprofit credit counseling services. You will make one payment a month to the credit counseling service. They will pay your creditors and negotiate better terms. You will repay your debts in full. You will also pay a monthly fee that ranges from $25 to $55, sometimes more.
- Debt settlement involves negotiating with creditors or debt collectors to accept less than the full payment amount you owe for a debt. You can negotiate on your own or hire a for-profit debt settlement company.
A debt management plan is better if you can pay your debts in full and want to protect your credit score. Consider debt settlement if you cannot afford to repay the total amount you owe and you’re looking for a financial reset.
READ MORE: Need help now? How to get free money and other assistance
At a glance: Debt settlement vs. debt management
| Debt settlement | Debt management | |
| How it works | Involves negotiating with creditors or debt collectors to accept less than the total payment amount you owe for a debt | You will make one payment a month to a credit counseling service and will eventually repay your debts in full |
| Types of debt | Unsecured debts like credit card debt, medical debt, personal loans, and private student loans | Unsecured debts like credit card debt, medical debt, personal loans, and private student loans |
| DIY option | You can call your creditors yourself, so you do not have to hire a debt settlement company | You could contact your creditors, ask for a reduction in interest rates, and set up a payment plan |
| Primary benefit | Lower monthly payments | Simplified payments |
| Other benefits | You’ll pay off debts faster Greater long-term savings Better option than bankruptcy Settled debts are permanently resolved Legitimate companies know which creditors and credit card companies refuse to settle Any damage to your credit score won’t be lasting Get out of debt within 12 to 48 months Calls from debt collectors should stop Working with professional negotiators Familiar with state laws | You can get out of debt within five to seven years You can resolve your debts without too much damage to your credit score One monthly payment Credit score doesn’t matter Working with professional negotiators |
| Primary disadvantage | Not all creditors or lenders will agree to settle | Completing a Debt Management Plan may take up to seven years and will cost more overall than debt settlement |
| Other disadvantages | Late fees could add up Does not include secured debts Not all unsecured debts can be settled The total amount of debt you have needs to be $10,000 or more You can typically only include accounts that are $500 or more Debt collectors can still attempt to collect the debt | It may take up to seven years. It takes discipline and patience It will be a public record on your credit report You may be required to close credit card accounts Closing credit card accounts could cause short-term damage to your credit score Most counseling agencies charge fees to administer a Debt Management Plan Some creditors may refuse to join the plan You could be dropped from the plan for missing or making late payments If you drop the plan or if the plan drops you, any improvements in rates or fees negotiated under the plan will end |
| Impact on credit score | There will be short-term damage at first but the long-term impact will be minimal | It may cause short-term damage to your credit score |
| Tax implications | The IRS may consider forgiven debt taxable income | None |
| Payment structure | You must make a lump sum or term payment after a settlement agreement is reached | You will make a single monthly payment to the credit counseling agency |
| Signs it may be right for you | You have more than $10,000 in debt You are facing financial hardship You don’t have any money leftover each month after paying creditors You’ve missed more than three consecutive monthly payments | If you plan to take out a significant loan, like a mortgage or a car loan, in the near future |
READ MORE: Debt settlement — how to get your debt under control now
Key similarities
- Both will require a steady monthly income.
- You will likely make one monthly payment with both debt relief plans.
- You can both consolidate or settle debt with a weak credit score.
- Professional negotiators will deal with your creditors on your behalf.
- Get creditors and debt collectors off your back.
- Both plans will take time and discipline to complete.
- If you enroll and do not complete either program, you could owe more fees than you started with.
READ MORE: Debt settlement fees
Key differences
Both debt settlement and debt management enable you to achieve debt relief.
Debt Management Plan: A nonprofit credit counseling agency negotiates with your creditors to lower the interest rates on your debts, yet you’re still responsible for paying the total amount you owe, plus a monthly administration fee ranging from $25 to $55 per month.
Debt settlement program: A company negotiates with your creditors to lower the total amount you owe. With debt settlement, you will not pay back every penny of the total amount you owe. You will pay the company a percentage of the total debt settled, usually ranging from 15% to 27%.
Both options apply to unsecured debt (debt without collateral), such as credit card debt and personal loans.
READ MORE: When is debt settlement a good idea?
How debt management programs work
A Debt Management Plan (DMP) is a form of debt consolidation. Credit counseling agencies are typically nonprofit organizations. A credit counselor will set up the plan and negotiate with creditors for lower interest rates and better terms. You will no longer pay your creditors directly. Instead, you will make a single monthly payment to the credit counseling agency, simplifying your payments and making it less likely that you’ll forget one.
A Debt Management Plan typically takes three to seven years to complete, and you may have to close some credit card accounts. It is an effective way to get out of debt if you have the patience and discipline to complete the plan. This may harm your credit initially if you have to close credit card accounts, but the damage should be short-lived.
Visit American Consumer Credit Counseling (ACCC) or the National Foundation for Credit Counseling (NFCC) to find a certified credit counselor.
Always check the accreditation and the agency’s reputation.
READ MORE: Debt relief programs
How debt settlement works
Debt settlement is negotiating with creditors or debt collectors to accept a lump-sum payment that is less than what you owe in full payment of a debt.
Creditors don’t want to accept a reduced amount, but it’s a better deal than bankruptcy (they get nothing) or selling your account to a collection agency for pennies on the dollar. If they think you can’t pay, they will often negotiate.
The debt settlement process has two major obstacles. You must make a lump sum or term payment to settle a debt. That means saving enough cash, which is hard for many borrowers to do. You will need to negotiate with creditors. Many debtors find this process intimidating and difficult.
You can save money for settlements and negotiate with creditors yourself or hire a debt settlement company to help you do it.
READ MORE: DIY debt settlement
Pro tip: A legitimate debt settlement company should offer a free initial consultation and demand no fees upfront. In addition, check with any company you’re considering to confirm that the company will provide access to an attorney if a legal problem arises.
The debt settlement industry is heavily regulated at the federal level, and some states also have strict laws limiting debt settlement companies. The Federal Trade Commission has provided a list of red flags if you’re looking for a legitimate debt settlement company.
READ MORE: Debt settlement companies
Which is the best option?
Both debt settlement and Debt Management Plans are legitimate options for people with serious debt problems. Your choice will depend on your circumstances.
A Debt Management Plan is a good option if you plan to take out a significant loan, like a mortgage or a car loan, in the near future. It may reduce your interest and fee expenses and should reduce your monthly payment, but it will not reduce the amount that you owe. It’s best for people with the capacity and the will to repay their debts over time. However, it ultimately could be more expensive than debt settlement.
Debt settlement is for people who cannot pay the full amount of their debts and are willing to take a significant short hit to their credit score and initially face escalated collection efforts to resolve their debts. It can be an effective way to reset your finances without filing for bankruptcy, and the overall cost will likely be lower than debt management programs. On average, debt settlement saves consumers $2.64 for every $1 in fees paid, according to the American Association for Debt Resolution.
Pro tip: The American Association for Debt Resolution was previously known as the American Fair Credit Council.
If your debts are completely out of control, your credit is already bad, and you’re considering bankruptcy, debt settlement is an option to consider.
READ MORE: Easy steps to pay off $10,000 in credit card debt
Both take discipline and time
It’s important to understand that neither of these solutions provides instant relief.
A Debt Management Plan can take three to seven years to complete. If you work with a debt settlement company, it may take anywhere from one to four years to complete the program. Either way, you will need the discipline to make regular payments for several years.
READ MORE: Debt settlement pros and cons
Other debt relief options
If neither of these options seems right for you, other forms of debt relief exist.
- Debt Consolidation
- Bankruptcy
READ MORE: Debt settlement vs. debt consolidation
The bottom line
Debt settlement programs and credit counseling organizations have a lot of key differences, but one thing is clear: Neither debt settlement nor debt management should be taken lightly and the company you choose to work with is a key factor in your long-term success. Consider the effects that both types of debt relief would have on your personal finances and your life before going with one of these options. Also, be sure to review the alternatives, such as a debt consolidation loan or a balance transfer credit card.
Doing nothing is not an option. If you are in financial trouble, you need to take action, and that starts with considering your options and choosing the best one for you. If you aren’t sure of your next step, contact DebtHammer today and set up a free consultation.
