Debt is a feature of our everyday lives in these modern times. Nearly every consumer has some kind of debt. Therefore, it’s no surprise that a combination of the increasing complexity of the financial industry and tough economic times mean that many consumers are facing debt problems.
It can feel overwhelming to struggle with debt. Constant letters and collection calls can make you feel like there’s no escape from the financial hole you’re in. Thankfully, there are options for people struggling with debt. While we’ve discussed debt consolidation loans elsewhere, two popular options for getting debt under control are debt management programs and debt settlement.
This article will compare debt management programs and debt settlement in an attempt to help you decide what option is right for you. We’ll go over what a debt management program is and the benefits and drawbacks of debt management. We’ll also help you understand what debt settlement is and the advantages and disadvantages that come with that option. Finally, we’ll have some thoughts to help you decide which option works best for your situation.
What is Debt Management?
Debt management programs are offered by for-profit and nonprofit companies. These programs are designed to help consumers take charge of their debt and start making progress in paying it down. Debt management programs come in several forms, and everyone faces a unique scenario, so the best debt management programs are tailored to the individual.
All debt management programs include some kind of credit and debt education. This learning experience helps you understand how credit and debt work so you can make more informed financial decisions. Moreover, debt management programs will be staffed by qualified debt and credit professionals. These individuals will help you craft a realistic budget so you can put the most money possible toward your debts and begin paying them down.
Many debt management programs also include other features. One common feature is bill consolidation. With bill consolidation, the debt management company tracks how much you owe to what lender each month. You then pay that amount plus an extra $25-$50 to the debt management company, that they ensure your bills get paid.
In addition to helping you tack your bills, many debt management programs will also negotiate with your lenders on your behalf. They will argue that your participation in the program means you’re less likely to default on your debts, and so you should get a lower interest rate. This can reduce the amount you pay each month, and lower the overall cost of your debt by thousands or even tens of thousands of dollars over the course of repayment.
Benefits of Debt Management
- Craft a budget to ensure financial predictability and stability
- Generate strategies for paying down debt as quickly as realistically possible
- Negotiate with creditors for reduced interest rates and repayment terms
- Cost effective method to resolve debt, since you don’t have to take out a new loan or pay many extra fees for the service
- Financial education to help you understand how credit and debt work and make better decisions in the future.
Drawbacks of Debt Management
- Doesn’t work if you can’t make your monthly payments
- Some people have too much debt for a debt settlement program to be effective.
- Costs a bit extra each month
- Requires discipline when it comes to credit and debt use.
What is Debt Settlement?
Debt settlement is a technique for paying off your debt for less than you owe. That may sound appealing, but you should be sure to evaluate the list of benefits and disadvantages of debt settlement before deciding it’s the option for you.
Debt settlement should be viewed as an option of last resort. It can ruin your credit, as you won’t be making your regularly scheduled payments, resulting in negative entries on your credit report. Additionally, your creditors are not under an obligation to accept settlement offers, so you may find that you’ve wrecked your credit for nothing.
In a debt settlement, you or someone negotiating on your behalf convince your creditors to accept a large lump sum that’s less than the total debt you owe, and the creditor agrees to consider your debt as paid back. If done correctly, debt settlement can be a useful tool for resolving debt issues, but it’s not for everyone.
Benefits of Debt Settlement
- Pay off your debts for less than the total you owe
- Stop collection calls and efforts
- Can help you avoid having your assets seized or being forced to declare bankruptcy.
Drawbacks of Debt Settlement
- Last resort option only – creditors will not consider debt settlement offers unless you’ve already missed many payments and they are worried that they won’t see regular payments resuming any time soon
- Destroys credit score – when you are in a debt settlement program you stop paying your lenders and instead pay into a special account that you don’t have custody of or control over
- Creditors don’t have to accept a settlement offer
- Most debt settlement companies charge a percentage of the settlement as their fee. That means you might not save as much as you think you will
- Most lenders won’t settle for pennies on the dollar, so you should still expect to pay back a substantial portion of your debt
- Companies will note the settlement on your credit report as paid less than owed. This will dramatically lower your score.
Should I Choose Debt Settlement or Debt Management?
For nearly every consumer, debt management is a better option than debt settlement. A debt management program can help lower your interest rates and get you back on track without wrecking your credit score. Moreover, debt management programs come with financial education to help you avoid getting into a bad situation again in the future. Most debt settlement programs don’t offer this kind of educational experience, increasing the odds that you’ll find yourself with debt issues once you’re done with the settlement process.
Debt settlement is the best option if you’ve already missed a series of payments, and aren’t going to have the money to make your payments anytime soon. Debt settlement can also be a good option if you’re not worried about your credit score, or if your credit score is already wrecked.