Debt Management vs Debt Settlement: How they Differ

Although sometimes confused or even used interchangeably, debt management and debt settlement are significantly different ways of tackling debt.

*Assumes completion of DSP as designed, including all program payments on time and acceptance of negotiated offers consistent with the plan.

Debt Management Plans (DMPs)

Credit counseling and debt management companies can negotiate reduced interest rates and even forgiven penalties for debtors. They can bundle a client’s accounts into a single package, consolidating and easing the debt burden. 

That said, the client has to pay off the entire balance to graduate the DMP. 

DMPs offer many advantages. 

• Participation in debt management allows you to keep a credit card open. 
• As a DMP participant, you are free to quit the program at any time. Such a course of action will, however, result in the resumption of collection efforts on all your accounts. 
• DMPs are kind to your credit score. While they typically do not allow you to open new credit cards and they may trigger a notation on your credit report, they do not typically cause your credit score to take as much of a hit as some other forms of debt relief.
• The company offering you the DMP operates with the approval of creditors. Thus, as a DMP participant, you are typically safe from legal action for the duration of the program. 
• It is relatively easy to qualify for a DMP. 

Debt management programs have their drawbacks as well. 

• During the duration of the plan, you cannot open new credit cards. 
• DMPs are only suitable for the management of credit card debt. 
• To enroll in a DMP, you need to pay an upfront fee (~$50-$75), and maintenance fees of $30-$55 per month. 
• According to the National Foundation of Credit Counselors, only around 54 percent of participants complete their DMPs. 

Debt Settlement

Debt settlement reduces the amount of the principal debt you owe. That means that your creditors agree to accept less than full payment to settle the debt.

There are several significant advantages to debt settlement.

• A Debt Settlement Plan (DSP) may save you a lot of money. It reduces your principal and saves you the interest you would have had to pay on the canceled debt. 
• Debt settlement tackles your accounts one at a time. Thus, if you fail to complete the program, you will have still resolved some of your debt. 
• Debt settlement manages multiple types of unsecured debts, not just credit card debt. 
• The money in the escrow account you use for debt settlement remains yours. You can withdraw it if you want to, and any interest it earns is yours as well. 
• Debt settlement plans do not carry any upfront fees. Fees are collected only after a settlement has been reached.
• Debt settlement makes financial sense, and it works. 

Debt settlement carries some potential disadvantages as well.

• Debt settlement could open you up to lawsuits from creditors. The approach is not a pre-approved one. 
• DSPs have an initial negative impact on your credit score. 
• Your canceled debt may carry tax obligations. 

The Bottom Line

Your unique financial situation dictates which of the two options is better suited to your particular needs.

If your debt load is less than $10,000 and you do not qualify for a debt consolidation loan, debt management might be a reasonable option that will help you get a lower interest rate and resolve your debt more quickly.

If you are carrying debt of $10,000 or more, however, debt settlement may be a better option for you. With debt settlement, you may be able to have some of your principal balance forgiven, along with interest and fees. 

Many ClearOne Advantage clients save as much as 50% off their original amount owed before fees on our program. Speak with a ClearOne Certified Debt Specialist at 866-481-1597 to discuss your debt relief options. To learn how much you can save through debt settlement, get a free savings estimate today.