Paying off debt isn’t an easy feat, and figuring it out on your own may seem like a daily struggle—but help is out there. However, debt relief organizations were not created equally, so you should know your options before deciding: debt settlement or debt management?
Debt Settlement or Debt Management?
While both courses of action are typically done through a third-party organization and address unsecured loans like credit cards, personal loans, and medical bills, these organizations are very different. We’ve broken down the differences so you can decide if one is right for you.
What to Know About Debt Settlement
- When you use a debt settlement company, they’ll advise you to stop paying on your debt, which will earn you late penalties and fees, plus a significant hit to your credit score.
- Credit companies are not obligated to settle with you, meaning you’ll now have more fees to pay back on top of a damaged credit score.
- Credit companies may retaliate by suing you, resulting in possible wage garnishment.
- Debt settlement companies are for-profit organizations that charge about 15%–20% of your settled debt.
What to Know About Debt Management
- A credit counselor will negotiate with your credit card companies to consolidate your loans into one affordable monthly payment (often reduced by 30%–50% of monthly payment).
- During the negotiation process, you’ll typically get a reduced interest rate (often 6%–10%), making it easier to pay back your loans.
- Debt management programs are managed by nonprofit credit counseling agencies that are required to be transparent and provide free budget counseling and financial education services.
- You’ll likely pay a small monthly fee of $40–$75 for the organization to manage your program.
- DMPs are designed so you can pay off your debt in three to five years.
- Your credit score will go up over time (instead of down).
While both types of programs can help you get out of debt, a debt management program allows you to pay off your loans more effectively, which is beneficial for your overall financial success.
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