Debt Management vs Debt Settlement: 4 Things to Know

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There are clear differences between debt management (i.e. credit counseling) and debt settlement (i.e. debt relief or debt consolidation programs). It is imperative that you understand the exhaustive list of differences before deciding what is right for you. In this article, you will learn

  1. Debt management and debt settlement definition
  2. A Personalized all-in cost and duration quote
  3. Debt settlement vs Debt management process
  4. Debt management vs Debt Settlement Alternatives

The goal is to help you make the most informed decision. Also. this article is quite long, so we also put together a video to help you understand the differences. We produce a lot of holistic debt settlement content, so feel free to check out our debt settlement playlist here.

What is Debt Management and Debt Settlement?

 
Debt Management: The process is accompanied by credit counseling. A credit counselor helps you put together a debt management plan. The counselor will attempt to negotiate with your creditors for a lower monthly payment. You pay the entire debt amount in debt management but can save money from a reduced interest rate and fees. These are often non-profit companies.
 
Debt Settlement: An individual or service working on your behalf to negotiate your debts by decreasing the total balance owed. You can save money by a reduced total balance amount. These are often for-profit companies. Debt settlement has had some issues in the past where debt settlement companies would charge upfront fees and never settle the debt. For this reason, you may also want to check CFPB’s information on debt settlement companies.

Debt Management vs Settlement Cost and Duration Calculator

As we have helped people decide between these options for years, we decided that the most helpful thing for folks was to build debt management vs debt settlement calculator (below) that would help you estimate the all-in cost and duration of both options, including alternatives such as bankruptcy cost and duration.
 
Here’s an example of the cost breakdown and duration for an anonymous example to help you compare your current monthly obligations to debt settlement vs debt management.
 
Image shows a debt management vs debt settlement quote including the program fees and payments to creditors.

Debt Management Process

Debt management companies work as an intermediary for those in debt and the creditor. The enrollee deposits money into an account managed by the debt management company. These funds are used to pay the creditors over a specific period of time, generally between 3-5 years. This period is inflexible as the creditor generally sets a maximum time limit for the debt to be resolved. The debt management company will do the following for the enrollee:
 
  • Create an enrollee-owned escrow for you to send payments to each month.
  • Communicate with the creditors to be the primary point of contact going forward.
  • Negotiate with the creditors on interest rates and charges.
  • Work with you to present a monthly payment plan to your creditors based on your financial situation.
  • Get consent from you on whether to accept the payment plan.
  • Manage all of the payments to the creditors until the debt has been completely resolved.

Important points to note:

  • When considering debt management, you should consider whether there’s a chance that you cannot make one payment in 5 years. Payment terms are generally the most inflexible in debt management.
  • The average interest rate reduction can cut your interest rate in half, but it’s important to note that you are paying back all of the debt.
  • Many people simply have too much debt to actually benefit from this program because the creditors generally set a maximum of no more than 5 years. You may have so much debt that a reduced interest rate would not help.

Debt Settlement Process

Similarly, debt settlement companies work as an intermediary for those in debt and the creditor. The settlement company will do the following for the enrolled participant:
 
  • Create an enrollee-owned escrow bank account for one monthly payment. Payments will be sent to creditors AFTER negotiations have been agreed upon.
  • Communicate with the creditors to be the primary point of contact going forward. This should help prevent future debt-collection calls to you.
  • Negotiate on behalf of the enrollee with each of the creditors for the lowest possible rate based on financial hardship.
  • Get consent from you whether to accept the settlement and payment plan.
  • Manage all of the payments to the creditors until the debt has been completely resolved.

Important points to note:

  • It’s imperative to understand who you will be working with AFTER you join the program. Many debt settlement companies have a salesman make the sale. After you join, these companies often transfer you to a customer service specialist. It may be helpful to find a program where you work with a specific financial counselor from start to finish.
  • Not all debt settlement companies are created equal when it comes to data utilization to maximize debt reduction. It may be helpful to ask, “How does your company use its data to maximize my debt reduction?”
  • It’s wise to understand the fee structure. Many debt settlement companies charge a percentage of the enrolled debt and a banking fee. You should know what percentage they charge and what the banking fee is. For example, having to pay 25% on an enrolled debt amount of $30,000 vs. 15% on an enrolled debt means that you would have to pay an additional $3,000. You can save a great deal more if you find a company that charges lower fees.
  • We wrote an article titled, “Are Debt Relief Companies Legitimate?” to help you navigate how to spot legitimate debt settlement/debt relief companies.

 

Debt Management and Settlement Payment Estimates

We believe what is helpful for you is to help you determine the plan payments of both options. Comparing payment options helps you determine affordability and allows you to look at both options holistically.
 
Let’s go through an example.
 

Debt Management Payment Estimate

Below is an estimate for a debt management program where $30,000 is owed.
 
A chart showing what you may pay if you enrolled in a debt management program.
 
Estimate assumptions:
  • Estimate is based on an average interest rate reduction from 22% to 8%
  • Debt management monthly fee of $50
  • Five year plan
  • All creditors work with the debt management program. Results may vary.

Debt Settlement Payment Estimate

Below is an estimate for a debt settlement program with the same $30,000 is owed.
 
A chart showing what you may pay if you enrolled in a debt settlement program.
 
Estimate assumptions:
  • Estimate is based on an average debt reduction of 50%
  • Debt settlement fee of 15% of enrolled debt
  • Five year plan. It is advised to pay more to eliminate your debt in 3 years or less, but estimate is to compare options.
  • All creditors work with the debt settlement program. Results may vary.

Comparison Analysis

Debt Management Payment: $670.95 for 60 months
Debt Settlement Payment: $337.66 for 60 months
 
You’ll notice that the debt management payments are often higher than debt settlement, but often less than paying off your debt without debt management. You may want to consider your budget when considering these options. That said, debt management may affect your credit score and report less negatively, so this is important to note.

Debt Management vs Debt Settlement Pros and Cons

Below is a list of debt management and debt settlement pros and cons. We include an estimated positive or negative weighting for each of the different options.
Attribute Debt Management Debt Settlement
Damage to Credit Report Low – Medium (If Remain Enrolled) Medium (7 Years, No Bankruptcy)
Damage to Credit Score Low (If Remain Enrolled) Medium-High
Debt Consolidation High High
Payment Flexibility Low High
Time 3-5 Years 2-4 Years
Legal Protection Medium Low
Qualification Yes Yes
On Public Record No No
Taxes on unpaid debt No Potentially (>$600)
Property Protection Yes Yes
Program Fees $0-$75 Per Month 15-25% of Enrolled Debt
Debt Amount Paid High Low
Success Rate Medium Medium (After 6 Months)
 

Debt Management and Settlement Alternatives

One of the most common alternatives to debt settlement and debt management is bankruptcy. The two most common types of bankruptcy are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. We wrote an article to explain both bankruptcies and calculators to determine whether you qualify and your estimated plan payment. The Chapter 7 Calculator determines qualification and the Chapter 13 calculator determines estimated plan payment.
 
Debt Settlement vs. Bankruptcy: The two most common consumer bankruptcies are Chapter 7 and Chapter 13. The biggest difference between bankruptcies is that Chapter 7 is much faster and wipes out most of your unsecured debt regardless of what you owe and Chapter 13 is restructuring of your debt, which is somewhat similar to a debt settlement.
 

What’s Best For You?

This depends on each situation and each individual. At Ascend, we prefer to provide you all of the information and understand your situation to help whether debt management or debt settlement is best for you. Once we have that information, we should be in a position to point you in the right direction.
 
Complete the debt management vs debt settlement calculator below to make the most informed decision.
 

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 08/21/2023

My family was grappling with the burden of credit card debt. We had explored various avenues, including debt relief companies and consolidation loans, but everything seemed dubious and left us feeling uncertain. That all changed when I came across Ascend and had the opportunity to connect with Justin. He reached out to me on the very same day, and from that point forward, things took a turn for the better.

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 07/26/2022

Ben and his assistant Jeffrey from Ascend Finance did an awesome job helping me to find an attorney who could talk with me openly and honestly about Chapter 13 as an option for my financial situation. Before finding out about Ascend’s bankruptcy calculators, I was stuck on a wheel of countless offers for consolidation loans, but always steered towards debt settlement or debt management plans over and over again due to my credit score and high utilization percentage. Based on data I entered into Ascend’s calculator, Ben and Jeffrey reviewed my situation and quickly connected me with a skillful, experienced bankruptcy attorney. I finally feel like I’m on the best path to being debt free; one that will save me a lot more money than any of the debt settlement or debt management programs that other companies and agencies have offered me… THANKS Ben, Jeffrey and Ascend!!

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 02/09/2024

These guys are truly a beacon for those of us with too much debt. From the start where I found Ben on the YouTube channel Ascend I have been treated as a real person by real people. Even getting a personal call helping me figure things out. I went through one of the lawyers recommended by Ascend and as of January 2nd I am debt discharged, and already have a great credit card from Mission Lane for $2000. Things are getting back into place and my life feels so much less stressful due to the weight of debt being off my shoulders.

PLEASE give these guys a call if you are even considering any sort of debt relief be it bankruptcy, consolidation, or whatever other types of debt relief are out there. I can’t thank the Ascend team enough. (I was not paid to post this, or told to do this. I am genuinely so thankful to have the help when I needed it most♥️)

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