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Debt Settlement & Debt Management: What's Better For You?

While the terms "debt management" and "debt settlement" may sound similar, they’re actually quite different. We’ve broken down the differences between the two to help you decide how you want to proceed combating your debt. 


What is a debt settlement company?


A debt settlement company is a third party that negotiates with your lenders to get your debt settled for a lower amount than you owe. 


What are the benefits of a debt settlement?


The biggest benefit is that you will potentially pay back less than what you owe. 


What are the downsides of debt settlement?


It’s bad for your credit. When you work with a debt settlement company, they’ll advise you to stop paying your lenders, which will result in late penalties and fees. A late payment can drop your score as much as 180 points, while a debt settlement will stay on your credit for up to seven years. 


Other cons to debt settlement include:

• Creditors can decide not to settle.

• Debt settlement companies may charge high fees, up to 15%–20% of your settled debt.

• Your creditors may decide to file a debt collection lawsuit. 

• Forgiven debt may be subject to taxation. 


What is a debt management company?


Debt management programs are offered by nonprofit consumer credit counseling companies, which also provide services like budget, credit, housing, and bankruptcy counseling. Additionally, RethinkingDebt offers educational workshops to help people become more financially informed. 


What are the benefits of debt management?


When you enroll in a debt management program, the certified credit counselor will work with your lenders to combine your unsecured debt so you can pay less in interest. Also, the program is designed to help you pay off your debt in three to five years with single, affordable monthly payments. 


What are the downsides of a debt management program?


You won’t be able to open any new credit cards during repayment - but this could even be considered a benefit. Another downside is that you can’t consolidate secured loans, like auto loans or your mortgage, but the same holds true for debt settlement. 


Debt Repayment Bottom Line

While the decision is ultimately up to you and what works best for your unique situation, a debt management program won’t destroy your credit as you work to pay off your loans.

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