Debt Management vs Debt Settlement

Compare debt relief programs so you can identify the best way to get out of credit card debt in your situation.

You might think that as a consumer credit counseling agency, Consolidated Credit would always advise against debt settlement. After all, we provide a “competing” debt relief solution – a debt management program. But the two programs are quite different and either may be the best solution, depending on your situation. So, we’re going to explain the differences between debt management vs debt settlement. That way, you can find the best way to get out of debt based on your situation, needs, and goals.

8 Ways to Compare Debt Management vs Debt Settlement

There are eight key differences between debt management and debt settlement.

Debt Management Debt Settlement
How much debt you repay All of it (100% of principal) Some of it (average 48% of principal)
The effect on your credit Positive or neutral Negative
How APR factors in Reduce or eliminated (0-11%, on average) Rates are not a factor
Fees Based on hardship; capped nationwide at $79, average fees $40 20-25% of original amount enrolled
Monthly payments Distributed to your creditors each month; usually lower All payments to creditors stop and divert to monthly set aside
Time to payoff 36-60 months, on average 12-48 months, on average
Total cost Total payments reduced by up to 30-50% Less than what you originally owed
Creditor approval Approved by creditors before you start Approval not guaranteed

 

#1: Paid-in-full vs settled-in-full

The first key difference between debt management and debt settlement is how much of your debt you repay. Debt management pays off the principal in full. That means you pay back every charge that you made. For some people, that’s a commitment that they want to keep.

On the other hand, debt settlement only pays back a percentage of what you owe. You pay off a percentage of the principal and the creditor agrees to discharge the remaining balance. This can be a relief if you owe so much that you’re overwhelmed with the idea of paying everything back.

#2: Save your credit vs sacrifice your credit

Achieve an excellent credit scoreWhen you settle a debt for less than you owe, creditors report the debt as settled-in-full to the credit bureaus. This creates a negative remark in your credit report that sticks around for seven years. Each debt you settle through a debt settlement program equals one more hit to your credit score.

Since creditors report debts paid back through debt management programs as paid-in-full, it avoids credit damage. In fact, as you pay off debt through a debt management program, you build a positive credit history. Many people complete a debt management program wit ha better score than when they started.

#3: Minimizing rates vs rates are irrelevant

A debt management program works by negotiating with creditors to reduce or eliminate interest charges applied to your debt. Creditors also agree to stop penalties, including penalty APR. This allows you to get out of debt faster, even though most people who enroll pay less each month. But in most cases, you usually end up paying some interest charges.

Conversely, rates are a non-issue when it comes to a successful debt settlement agreement. You only pay off a portion of the principal, so rates never come into play. However, if the debt is still with the original creditor, then rates and penalties continue to stack up until the creditor agrees to a settlement offer.

#4: Fees for hardship vs fees for profit

Most people enroll in a debt management program through a nonprofit consumer credit counseling agency. That means these agencies provide programs with the lowest fees possible to help consumers that are struggling. Setup and monthly administration fees are based on financial hardship and rolled into the monthly program payments. They’re also state-regulated and capped nationwide at $79, so you’ll never pay more than that.

By contrast, debt settlement fees are regulated by very few states. The only federal regulation prevents settlement companies from charging fees upfront. If you don’t live in one of the few states that caps settlement fees, they average around 20-25% of the original amount enrolled for settlement.

#5: Paid as agreed vs paid to the settlement company

Professional credit card debt help can make it easier to reach zeroWith a debt management program, you still owe your original creditors. You make one monthly payment to the credit counseling agency, but they distribute it to your creditors on your behalf. Creditors agree to accept a reduced amount, but you’re still paying them every month. This is how you build a positive credit history because the payments get noted on your credit report. The payments are based on your budget and generally lower than what you pay individually before you enroll.

One misconception with debt settlement is that you’re instantly freed from making any type of monthly payment. You’re not – unless you happen to have the money for the settlement just sitting around. If you don’t, then the debt settlement company will advise you to stop making any payments to your creditors. Instead, you divert the money into a monthly set-aside account to generate the funds for a settlement. But you still pay each month.

#6: Faster payoff vs fastest payoff

Both debt relief programs help you pay off debt faster than you could with traditional payment methods. But the speed at which they do it differs.

On average, people who enroll in a debt management program complete it within 36 to 60 payments. That’s between 3 to 5 years to become debt free. The average completion time for a debt settlement program is shorter – between 12 and 48 months.

Traditional payment methods (especially if you only make minimum payments) will take decades to take significant credit card debt back. If you owe $10,000 at an average APR of 18%, it will take 24-28 years to become debt free. The variation depends on whether your minimum payment is $15 or $25.

So, a debt management program is significantly faster. But it’s not as fast as a debt settlement program typically is. The only solution faster than debt settlement is Chapter 7 bankruptcy. Chapter 7 can be completed in six months to a year. Still, if you want to get out of debt as fast as possible without filing for bankruptcy, debt settlement is the best choice.

#7: Cheaper vs cheapest

Both programs also help you save money versus traditional monthly payments. However, debt settlement is almost always the cheapest option. It’s the best way to get out of debt for the least amount of money possible.

The average settlement amount is 48% of the debt enrolled in the program. So, if you owe $10,000, the estimated settlement would be $4,800. Then you pay a 20% fee on the $10,000 or $2,000 to the settlement company. The total amount you pay is $6,800 – i.e. less than what you owed. Thus, debt settlement is the cheapest option, because you get out of debt for less than you originally charged.

By contrast, a debt management program pays back the full principal. You’d pay back the full $10,000 you owe. Then you’d pay some interest charges. A debt management program reduces your total payments by up to 30-50%. At 18% APR with minimum payments of $25, you’d pay $24,038.60 total. On a DMP, you’d pay between $12,019 and $16,827. So, there are significant cost savings, but it’s not as much as you enjoy with a settlement.

#8: Approved by creditors vs contingent on negotiations

When you enroll in a debt management program, each of your creditors agrees to accept payments through the program. They agree to this before you ever make your first payment. In other words, you get creditor approval prior to starting your payments. As long as you follow the program, your creditors will be happy, and you’ll be out of debt as planned.

By contrast, results aren’t guaranteed with debt settlement. You stop making payments to your creditors and they don’t give you permission to do so. So, penalties and interest charges continue to stack up on debts that aren’t in collections. And there’s no guarantee that once you have the funds to make a settlement offer that the credit card company will take it. They can reject your offer and refuse to play ball. That can back you into a corner where your only option will be to file for bankruptcy if settlements don’t go your way.

Debt Management vs Debt Settlement: Pros and Cons

Each debt relief program has its advantages and its drawbacks.

Relief Program Pros Cons
Debt Management
  • Avoids credit damage
  • May raise your credit score
  • Honors a commitment to pay what you owe
  • Freezes your accounts
  • Usually takes longer than settlement
  • Costs more, since you repay the full principal
Debt Settlement
  • It’s the fastest way to get out of debt outside of Chapter 7 bankruptcy
  • It’s usually the cheapest solution
  • It will ruin your credit
  • Settlement agreements are not guaranteed

 

When is debt management the best debt relief option?

Debt management programs are designed for people who still have something to lose when it comes to their credit. Debt management is the best choice when:

  • you still have a fair or better credit score that you want to save
  • most of your debts are still with the original creditors
  • you feel committed to paying everything back

It takes more time, work and money to complete the program versus settlement. But you’ll be in a much stronger position moving forward after you become debt free. Your credit score will still allow you to qualify for financing you need, and you’ll enjoy lower interest rates.

When is debt settlement the best debt relief option?

Past due debt payment have hit an all-time high

Debt settlement programs are for people who just want out of debt as quickly as possible for the least amount of money. It’s usually the best choice when:

  • your credit score is already bad
  • most of your debts are already in collections
  • you just want out

As the saying goes, you can’t fall off the floor. So, if your credit already hit rock bottom, you don’t have any farther to fall. And if your debts are already in collections, you don’t need to worry about extra interest charges and penalties when you stop payments. Debt collections can’t levy additional penalties or interest charges on credit card debt.

There’s also less risk if the negotiation fails. If a collector refuses to accept a settlement offer, they can either take you to court or try to harass you into paying more. You can choose to fight them in court or try to wait out the 10-year clock on the statute of limitations for collecting a debt.