There are clear differences between debt management and debt settlement (debt relief). It is imperative that you understand the exhaustive list of differences before deciding what is right for you.
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The question of whether to pursue debt management or debt settlement is a common question for those considering debt relief.
In this article, you will learn about debt management and debt settlement, get a detailed understand of the process, and see the pros and cons of both of these options. The goal to help you make the most informed decision.
Debt Management: The process is accompanied by credit counseling. A credit counselor helps you put together a debt management plan. The counselor will attempt to negotiate with your creditors for a lower monthly payment. You pay the entire debt amount in debt management but can save money from a reduced interest rate and fees. These are often non-profit companies.
Debt Settlement: An individual or service working on your behalf to negotiate your debts by decreasing the total balance owed. You can save money by a reduced total balance amount. These are often for-profit companies. Debt settlement has had some issues in the past where debt settlement companies would charge upfront fees and never settle the debt. For this reason, you may also want to check CFPB's information on debt settlement companies.
Before we go further, I thought it would be helpful to create a short video to explain the key differences between debt management and debt settlement.
As we have helped people decide between these options for years, we decided that the most helpful thing for folks was to build debt management vs debt settlement calculator (below) that would help you estimate your fees and compare pros and cons from both options.
Please note the calculator can take a few minutes to complete, but the goal of the calculator is to allow you to compare all of your different debt relief options holistically to help you be informed of your best decision.
Debt management companies work as an intermediary for those in debt and the creditor. The enrollee deposits money into an account managed by the debt management company. These funds are used to pay the creditors over a specific period of time, generally between 3-5 years. This period is inflexible as the creditor generally sets a maximum time limit for the debt to be resolved. The debt management company will do the following for the enrollee:
Similarly, debt settlement companies work as an intermediary for those in debt and the creditor. The settlement company will do the following for the enrolled participant:
We believe what is helpful for you is to help you determine the plan payments of both options. Comparing payment options helps you determine affordability and allows you to look at both options holistically. Let's go through an example.
Below is an estimate for a debt management program where $30,000 is owed.
Below is an estimate for a debt settlement program with the same $30,000 is owed.
Debt Management Payment: $670.95 for 60 months
Debt Settlement Payment: $337.66 for 60 months
You'll notice that the debt management payments are often higher than debt settlement, but often less than paying off your debt without debt management. You may want to consider your budget when considering these options. That said, debt management may affect your credit score and report less negatively, so this is important to note.
|Attribute||Debt Management||Debt Settlement|
|Damage to Credit Report||Low - Medium (If Remain Enrolled)||Medium (7 Years, No Bankruptcy)|
|Damage to Credit Score||Low (If Remain Enrolled)||Medium|
|Time||3-5 Years||2-4 Years|
|On Public Record||No||No|
|Taxes on unpaid debt||No||Potentially (>$600)|
|Program Fees||Low (Choose Non-Profit)||20-25% of Enrolled Debt (Ascend = 15%)|
|Debt Amount Paid||High||Low|
|Success Rate||Low to Medium||Low to Medium|
One of the most common alternatives to debt settlement and debt management is bankruptcy. The two most common types of bankruptcy are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. We wrote an article to explain both bankruptcies and calculators to determine whether you qualify and your estimated plan payment. The Chapter 7 Calculator determines qualification and the Chapter 13 calculator determines estimated plan payment.
Debt Settlement vs. Bankruptcy: The two most common consumer bankruptcies are Chapter 7 and Chapter 13. The biggest difference between bankruptcies is that Chapter 7 is much faster and wipes out most of your unsecured debt regardless of what you owe and Chapter 13 is restructuring of your debt, which is somewhat similar to a debt settlement.
This depends on each situation and each individual. At Ascend, we prefer to provide you all of the information and understand your situation to help whether debt management or debt settlement is best for you. Once we have that information, we should be in a position to point you in the right direction.
Complete a short questionnaire to see which solution is best for you!