Debt Management vs. Debt Settlement: What’s the Difference?
When you’re drowning in debt, struggling to pay the bills each month, it’s tempting to grab the first life raft that floats your way. Fair enough.
Yet unrestrained panic is also why people often file for bankruptcy, only to realize later there were better, less drastic options available for solving their personal debt crisis.
These options can include either a debt management plan or debt settlement plan. But here, too, choosing hastily could result in doing more harm than good to your long-term financial health.
So what’s the difference between them? Each has the potential to lift you out of debt, but which one is better?
Asking the Right Questions
The first thing to understand is that neither plan is a loan. Each simply offers a way to reduce monthly payments to your creditors. There is nothing to pay back.
But “better” is a relative term. The way to approach a decision like this is to ask which solution is most appropriate for your circumstances. For example, how urgently do you need debt relief? Can you afford to maintain regular monthly credit card payments? Do you wish to protect a good credit score?
Your answers will determine which debt-relief solution is most appropriate for you.
A debt management plan rolls all of your debts into one monthly payment – at a lower interest rate than you presently pay on your credit cards.
It’s a powerful way to wipe out credit card debt, and to save money doing so. Decreasing the number of payments to your creditors each month, as well as your total monthly payout, can help lower your monthly debt payments by 60-65%.
A credit counselor will help you create a budget-friendly plan to pay down your debt. If your credit report is solid, and you’re still able to make at least minimum monthly credit card payments, a debt management solution can help retire the body of your unsecured debt in about 48 months.
That’s six times faster than if you continued making minimum monthly payments on your credit cards for the next 25 years.
Also, contrary to the belief that engaging in a debt management plan damages your credit score, doing so can actually help improve your score because you’ll be paying creditors on time each month, as well as paying off all your debt.
So a debt management plan can be an effective way out of debt for careful money managers who foresee making on-time credit card payments each month for the next two years.
Debt settlement also refers to the process of clearing your debt with creditors for less than what you owe. It’s considered the quickest and least expensive way out of debt, and represents perhaps the best option for anyone seeking urgent debt relief.
But it’s not for everyone. There is risk, akin to playing a game of chicken with your creditors – if you lose, you can lose big. Whether it’s right for you depends largely on your credit history, and the urgency of your financial circumstances.
On the plus side, if you’re looking for immediate debt relief, and can still afford to make at least 60%-70% of your minimum monthly payments, then debt settlement might change your life. A good debt settlement company can reduce what you owe by up to 50%.
It’s important to understand two things before engaging in debt settlement: 1) you must stop making regular monthly payments. Creditors must understand you are no longer able to pay; and 2) your creditors have no legal obligation to negotiate a settlement.
So this creates risk. Stopping payments will hurt your credit score, and your creditors may sue you.
However, you have one important advantage: creditors prefer to get something back rather than nothing, and realize they’re likely to recover more through debt settlement than by referring your debt to a collection agency.
This gives you a solid foundation on which to open negotiations with a creditor. But you’ll need patience and persistence, particularly if you intend to negotiate debt settlement yourself. Credit card companies have a way of discouraging you with hardball negotiation tactics that tend to cause the faint of heart to give up and file for bankruptcy.
This is where you might consider hiring an experienced debt settlement company. They don’t get intimidated, and have the time it takes – up to two years sometimes – to make the persistent calls to your banks and creditors to strike the most advantageous settlement possible for you.
As for its effect on your credit score, it’s true that by stopping payment your score will initially decline. But once your debt has been settled your score will start to climb again. In six months it may even be equal to, or higher than, what it was before the settlement process began.
So if your need for relief is urgent, and you’re still able to make at least 60%-70% of your minimum monthly credit card payments, a debt settlement solution has the power to make you debt-free within 24-48 months, faster than any other debt-relief option available.
Level Financing’s credit counseling team invites you to develop a customized plan of attack for wiping out your entire credit card debt and lowering your monthly payments to a fraction of what they were – in a fraction of the time it might take for you to do so on your own.