A clear guide for U.S. consumers comparing debt management and debt settlement options. Learn the pros, cons and credit score impacts of both to pick the right debt relief option for your financial situation.
When the bills are piling up and getting out of debt feels impossible, many people turn to debt relief options. Debt management and debt settlement are two common options for help. The differences between these debt relief strategies can have major impacts on your credit score, stress level and financial peace of mind.
This guide will help people in the United States understand the differences between debt management and debt settlement. It will explain both debt relief strategies, evaluate the pros and cons of each and provide tips to help you decide which option is right for you.
Debt Management
Debt management is a structured repayment plan with a lower, single monthly payment set up to pay off debt in full over time. Plans are usually offered through a non-profit credit counseling agency, like the Financial Counseling Association of America (FCAA) members.
Debt Settlement
Debt settlement is a plan used to attempt negotiations with creditors to pay less than the full amount owed. Debt settlement typically has a greater impact on credit scores, tax implications and financial risk. For-profit companies typically offer debt settlement, although self-negotiation is also an option.
What is debt management?
A debt management plan combines multiple unsecured debts – like credit card debt or personal loans – into a lower, single monthly payment with minimal long-term impact on your credit score.
Non-profit credit counseling agencies create structured debt management plans to help qualified individuals pay off debt faster and learn how to stay out of debt in the future. They work with creditors to lower interest rates and reduce or eliminate fees, which often results in a decrease in the amount owed.
Monthly payment amounts in a debt management plan will vary depending on the individual’s debt. When working with a non-profit credit counseling agency, your monthly fee will be minimal, set by regulations in your state. Your single, monthly payment will be sent directly to your credit counseling agency, which will distribute it to your creditors.
“FCAA counselors work with your creditors to secure lower interest rates on your accounts,” said FCAA president Martin Lynch. ”That gives you breathing room in your budget, saves you money and allows you to repay your balances in full while re-establishing a record of on-time payments.”
Debt management programs usually take three to five years to complete.
Debt management programs may require you to close some of your credit accounts and not use those cards for a time. Closing some of your accounts may initially affect your credit score, but if you follow your debt management plan, your credit score will improve over time.
When you complete a debt management program, your debts will be paid in full, enabling you to confidently enter financial freedom with new, healthy financial habits.
Debt management plans:
- Are offered by non-profit credit counseling agencies, like FCAA members
- Can reduce interest rates and fees on unsecured debts
- Consolidate payments into one monthly payment that you can afford
- Help you pay off your debt fully and learn how to stay debt-free
- Typically take three to five years to complete
- May initially affect your credit score but have the potential to improve it over time
What is debt settlement?
Debt settlement plans require individuals to stop making payments to their creditors in an attempt to negotiate a lower final payoff amount than what is owed. They are typically a last resort for people with overwhelming debt.
For-profit debt settlement companies collect payments from you and put them into a trust account until about half of what you owe has been collected. During this time, your accounts will be placed in delinquency and may be sent to collections. Once enough money has been collected, the for-profit settlement company will try to negotiate a lower payoff amount with creditors.
Debt settlement can take between two and four years to complete.
“Debt settlement is a repayment strategy that carries significant risks for consumers,” said Lynch. “Creditors are not obligated or required to accept a settlement offer on any account. The consumer could be sued by their credit card company at any time for non-payment.”
Debt settlement often comes with high fees – up to 25 percent of the amount forgiven by the creditor. These fees are paid to the debt settlement company and sometimes to your bank to set up a trust account where your money will be held.
If you are offered a loan to accelerate the settlement, there may be interest charges on the loan. If your debt is forgiven, the government will look at the forgiven amount as income that is subject to income taxes.
“A newer and much better option recently introduced is a non-profit version of settlement offered by Money Management International (MMI), an FCAA credit counseling agency,” said Lynch.
“Their counselors will work with your creditors to secure a settlement agreement up front. Then they remit payments to the creditor every month to help the consumer avoid legal consequences. There’s much more to this method … but it’s going to be a tremendous alternative to the way for-profit settlement companies work.”
For-profit debt settlement plans:
- Are offered by for-profit companies or done by self-negotiation
- Withhold payments to creditors in hopes of negotiating a lower payoff amount
- May allow you to pay a lower payoff amount to creditors, but other fees may decrease your savings
- Can result in collections calls or even being sued by your creditors
- Take two to four years to complete
- Will likely damage your credit score significantly
Pros and Cons of
Debt Management and Debt Settlement
| Feature | Debt Management | Debt Settlement |
|---|---|---|
Pros & Cons |
|
|
| Credit Score Impact | Minimal to moderate | Significant |
| Provider | Nonprofit credit counseling agency | For-profit settlement company or self |
| Timeframe | 3–5 years | 2–4 years |
| Tax Implications | None | Possible |
| # of Monthly Payments | One | One |
| Cost | Minimal - credit counseling agency fees are legally regulated, so you will likely not pay more than $30/month | 25% of your “savings,” plus additional fees and potential tax implications |
Does debt management work better than debt settlement?
Generally, debt management plans work best for individuals with multiple unsecured debts, such as credit card debt, personal loans, lines of credit or medical bills. They often reduce monthly payments, provide free, ongoing financial advice and support and strengthen credit scores over time.
Debt management plans cannot be used for student loans, car payments, mortgages or other secured loans.
Debt settlement may work better if you have substantial, overwhelming debt with one or more creditors, but it is still very risky. This form of debt relief comes with months of high-pressure collection calls, significant late fees and credit score damage. It could even result in a lawsuit against you.
To figure out which debt relief option will work best for your financial situation, contact a certified credit counselor.
Get debt relief help for your situation
By working with an FCAA-affiliated nonprofit credit counseling agency, you will get unbiased, trustworthy financial advice that best fits your particular situation.
“Credit counseling agencies are education-based at their core,” said Lori Pollack, Executive Director of FCAA. “When a consumer calls, a non-profit counselor isn’t thinking, ‘How do I monetize this?’ They are focused on what is best for the consumer. They take a big-picture, human approach to reviewing each person’s financial situation.”
To start your journey to financial freedom, contact a certified, FCAA-member credit counseling agency today!
Frequently asked questions
What’s the main difference when comparing debt management and debt settlement?
Enrolling in a debt management plan is generally considered a safer financial option than debt settlement. A debt management plan offers peace of mind, costs less, has a lower impact on your credit score (and can even help improve it over time) and won’t cause creditors to potentially sue.
Which option hurts my credit score more?
Debt settlement plans will lower your credit score more. A consumer with a low FICO score may still lose another 60-75 points for settling their debt, while a consumer with a higher score could lose somewhere around 125 points.
How long does debt management take?
Debt management programs generally take about three to five years to complete.
Can I switch from debt settlement to debt management?
You will need to speak with a certified non-profit credit counselor to determine if you can switch from a debt settlement plan to a debt management plan.