Managing Debt vs. Settling Debt: Which One to Consider

If you feel anxious every time you get your credit card statement, you may be one of 38 percent of American households struggling with credit card debt. You are also the type of person that needs to research their debt-repayment choices. Some choices could appear beneficial at first, but turn out to be detrimental later.

Read on to find out the critical distinctions between debt management and debt settlement, as well as why it is essential to understand how each approach works and how it might help you get out of debt.

Key Distinctions between Debt Settlement and Debt Management

At first glance, it is easy to confuse debt management and debt settlement. Nothing could be further from the truth. While they both may result in a change to your credit score, getting there differs with each. Here are several distinctions:

1. Repayment timeframe

Eliminating debt through debt management takes time. Even though the repayment period may stretch over a number of years, you may expect to be utterly debt-free once it ends.

Debt settlement is an expedited method of paying off all of your debt in one payment.

2. The repercussions on your credit

Debt settlement and management can improve your credit score over time, regardless of how good or terrible it is right now.

A higher credit score is the result of responsible credit management over a long period of time. Debt settlement, while potentially devastating to your score at first, will allow you to begin improved money management practices after you’re debt-free.

3. Qualifications

Even if you have been making your minimum payments on schedule, you may still qualify for a debt management program if you have a significant amount of debt.

It usually takes a few months of consistent payments before creditors will consider a debt settlement with you.

4. The repaid amount

You can eliminate your debts and reduce your interest rate with debt management.

When you settle your debt, you and your creditor will agree on a reduced payment, but you will still owe taxes on the amount of your debt that is canceled.

So, to sum up…

Debt management, in its most basic form, is a plan devised by your creditors to aid in your long-term repayment of said debt. There are rules in place to ensure that you stick to the program, or else you will lose the subsidized prices they have been offering. It is generally an excellent way to handle paying off debts if you need to become more adept at self-accountability.

By settling your debts, you can protect yourself financially from the worst-case scenario. Debt settlement is often the last choice for people who are considering bankruptcy.

An Overview of Debt Management

Now that you are familiar with the fundamentals of debt management, let us take a closer look at this strategy for paying off financial obligations. Even while both debt consolidation and debt management programs result in a single monthly payment, debt management programs differ in that they impose additional penalties for late or missed payments.

Pros

• Increased credit score. Once you participate in a debt management program and start making regular payments, your credit score should begin to rise.
• Greater responsibility. There is real accountability for making on-time payments because of the consequences of not keeping up with the debt management program’s requirements. You have just landed a great offer that would facilitate your debt repayment, and it would be foolish to let it slip through your fingers.
• Pay only once per month. There will only be one payment to worry about each month, just like with debt consolidation. Unlike debt consolidation, it won’t be applied to any other loans you may have. Your debt manager will use the funds you send them to settle your accounts with creditors. You won’t have to keep track of different payment dates and totals.

Cons

• Institutionalized rigidity. A rigid payment schedule won’t seem like a drawback if you are able to make your payments on time every month. If you get into debt, you cannot pay it off; it is a fraud. Due to the stringent nature of debt management programs, there is absolutely no wiggle room for missed or late payments.
• Not suitable in cases of too much debt. The average term for a debt management plan is five years. If you have accrued so much debt that you cannot hope to repay it in that time frame, then it may be pointless to enroll in even the best program; perhaps a different strategy would be more appropriate.
• Costs beyond the original estimate. The debt management company may take a cut of your monthly payment. While they may have helped you avoid some expenses with your creditors, their own fees may be as much as or even greater than what you were paying previously, unless the agency is non-profit. Think of it as a fee for processing your payment. You may rest assured that your payments will be processed promptly by paying them.

You should consider debt management when…

• You are unable to get a personal loan or create a new credit card for a debt transfer because of your low credit score.
• Credit card balances make up the bulk of your debt.
• You would benefit from a higher authority keeping you accountable for your spending and repayment habits.

An Overview of Debt Settlement

There are benefits and drawbacks to settling debts. The upside is that it can help you get out of debt quickly, but the downside is that not all creditors will accept a reduced payment. Getting into a situation where settlement talks are even possible is a game, and you won’t always come out ahead. If you decide to settle your debts, you probably won’t do it on your own and will instead contact a debt settlement company.

Pros

• Save money. If you are one of the lucky ones, you can probably settle for a lot less than you owe right now. You will have to fork over that cash all at once, but then it is all over!
• Negligible decrease in credit score. Your credit score will take a knock, no matter how low it already is, but it won’t be anywhere near as severe as if you filed for bankruptcy.
• Remain in possession of all belongings. One possible outcome of declaring bankruptcy is the sale of one’s possessions. You can prevent losing your possessions and avoid bankruptcy by settling your obligations.

Cons

• You must become a “known offender.” You play a game in which you knowingly become late on your accounts in order to induce your creditors to negotiate a settlement with you. They are more likely to be amenable to lowering the payment if they can see that you are having trouble making the installments.
• It is not a given. The following explains why this game should be avoided at all costs. Some creditors have zero obligation to offer you a settlement package, no matter how long you’ve been behind on your payments.
• You could worsen your financial situation. If you lose the game, you’ll be even further behind on your loan payments. Your credit score has probably already begun to decline, and any further fees you accrued will have to be paid on top of your already massive debt.

You should consider debt settlement when…

• A bankruptcy filing is feared to be your last resort.
• The collection process has begun.
• You are completely trapped by your debt and cannot see a way out.

Key Takeaway

Filing for bankruptcy may be your only remaining option if you have exhausted all other debt-relief options without success. Keep in mind that declaring bankruptcy can only relieve unsecured obligations such as credit cards and personal loans.

Collect as much data as possible about your debts and consult a financial counselor before making any moves. To avoid repeating past mistakes with money management, filing for bankruptcy may prove to be a valuable experience.