When your attempts at resolving your debt problems on your own seem to hit a dead end, the two main solutions many people look at are debt settlement and debt management. Debt settlement is a relatively short process whereby the consumer confronts creditors and refuses to make any more payments until the creditors agree to a more favorable plan.
Debt management is more elaborate and involves paying off accumulated debt over several years following an agreement with creditors (usually credit card companies). Debt management is a more realistic path out of debt than debt settlement. Here are the key reasons why.
1. Objective Advice
Debt management plans are provided by credit counseling agencies that are non-profit. These agencies are regulated by the federal and some state governments. They are audited too, which means they are less likely to take advantage of a consumer. Debt settlement companies, on the other hand, are for-profit entities and aren’t subject to as much oversight.
Credit counseling agencies are in many ways a classroom for personal finance education. As nonprofits, their primary objective is to educate consumers on managing debt. It can cover everything from budgeting planning to applying the ebitda formula to your overall income. While getting out of debt may be the more immediate need, the goal is to equip the consumer with the requisite knowledge to manage their money and any debt in the future.
Debt settlement companies are less inclined to spend time on education as it doesn’t do much for their bottom line.
3. Monthly Payments
Payments you make to a debt management program will go toward reducing your debt. The credit counseling agency takes on the responsibility of ensuring timely payments to creditors every month.
With debt settlement, any payments you make are deposited into an account. The money continues to accumulate until the debt settlement company comes to a final agreement with the creditors and uses the funds to settle the debt. Of course, settlement isn’t guaranteed so it comes down to whether the creditors are persuaded. Often, they’ll refuse to settle and instead seek to garnish your wages through a court judgement.
4. Credit Score
With debt settlement, you suspend any payments to creditors until they agree to the settlement plan. This is effectively a default and can destroy your credit score.
By law, debt management plans cannot directly affect your credit score. You may, however, see an indirect impact such as a slight decline in your credit score because you aren’t taking up as much credit as you used to before. This decline is, however, far smaller than what you would experience with debt settlement.
5. Collection Calls
Collection calls are the main reason consumers turn to credit counseling agencies. Once you enroll in a debt management plan, communication now happens between the agency and the creditors. This brings an end the collection calls.
It’s different with debt settlement. Since nothing is agreed on from the start and there’s no guarantee it will, the collection calls will continue. Actually, they may grow in intensity as the creditors make a final push to collect as much as possible before a settlement is finally reached.
Both debt management and debt settlement services come at a fee. Debt management fees are regulated and therefore usually lower. Debt settlement firms charge a fee that’s a percentage of the enrolled debt and cannot levy a fee upfront. This percentage can be as high as 20 percent.
With these advantages, debt management is almost always the best path out of a difficult debt situation. To qualify, you must have the ability to pay off the outstanding debt in 5 years without forfeiting your basic normal expenses. If you do not meet these requirements, the only other alternatives would be debt settlement or bankruptcy.