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
- Debt management and debt settlement definition
- A Personalized all-in cost and duration quote
- Debt settlement vs Debt management process
- 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 vs Settlement Cost and Duration Calculator
Debt Management Process
- 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
- 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
Debt Management Payment Estimate
- 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
- 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 vs Debt Settlement Pros and Cons
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
What’s Best For You?
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