Debt Management vs. Debt Settlement: What’s the Difference?

If you’re burdened with financial obligations that are spinning out of control, you may be wondering what options you have and where you can turn for help. When seeking advice, it’s important to know the difference between debt management and debt settlement.

Debt Management
If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan. Debt management agencies can help make it easier for you to repay credit cards, medical bills and personal loans. When you enlist their services, they will contact your creditors and request certain concessions, such as: interest rate reduction, waiver of late fees or over-the-limit fees or a reduced monthly payment amount. With a debt management plan, you’re still obligated to pay your balance in full, however, the reduced monthly payments make it more manageable for you to do so.

A debt management company acts as the liaison between you and your creditors. Typically, as part of your debt management plan, you send the debt management company one monthly check and they’ll handle paying your multiple creditors. The plan is voluntary for your and your creditors. You will sign an agreement for services to start the plan and there is an expectation that you won’t take on any new debt during the plan. If you do incur new debt, some creditors may discontinue their concessions. As long as you continue to meet your end of the bargain, the reduced fees, lower interest rates and other concessions will continue until your debt is paid off. If you miss payments, creditors may eliminate concessions as well as continued payments through the plan.

One drawback to undergoing any debt management plan is that your credit score will likely be affected, primarily because your lines of credits must be closed. However, your actions show that you’re trying to work through your financial obligations, and, in some cases, your score will improve as you make consistent payments over time.

Keep in mind you do not have to go through a third-party (credit counseling agency, debt management company). If you’re willing to contact your creditors and state your own case, they may be willing to work with you. In fact, if you’re starting to fall behind, contacting your creditors should be your first step. The longer you ignore your financial problems, the worse they will get.

Not all credit counseling agencies are the same—some will charge high counseling or debt management plan fees while others don’t offer any counseling to help you avoid financial mishaps in the future.

NWFCU’s partner, BALANCE Financial Fitness, is a good example of a trustworthy service you can turn to for credit counseling and debt management solutions. BALANCE services are confidential and free to all NWFCU members.

Debt Settlement
Debt settlement plans differ greatly from debt management plans. Debt settlement companies are often in business to make a profit not to help you. They charge an upfront or monthly fee (typically 15-20% of your debt total), for their services. Worse yet, some companies are scams and will take your money and disappear.

Debt settlement firms often pitch their services as an alternative to bankruptcy. They may falsely claim that using their services will preserve or improve your credit score, your debt obligations will be cut in half, your financial troubles will be over in months, and that you can’t be sued for nonpayment. In reality, these companies often do not have special creditor associations and the deals they arrange are no better than what you can negotiate on your own. In fact, using their services can damage your credit, set aggressive collection activity in motion, cause your debt to grow and become more problematic, and trigger lawsuits.

Debt settlement firms operate on the premise that your creditors will settle for a lesser amount than the full loan balance. In reality, there is no guarantee that a creditor will accept partial payment of a legitimate debt and you may not find that out until after you’ve signed the debt settlement company’s contract. At this point, you’re obligated to pay the debt settlement company X dollars per month, yet your debt is not being paid off. The debt settlement company is essentially holding you and your money hostage until you’ve built up enough funds to offer lump-sum payments to your creditors. Meanwhile, since you’ve stopped making payments on your accounts, late fees and interest charges continue to accumulate, adding to your overall debt.

Last but not least, a debt settlement program shows up as “accepted as settlement” on your credit report which may be seen as less favorable than the hit you’ll take on your credit score by undergoing a debt management plan.

In a debt crisis? Take 5!

If you’re having trouble paying your bills, contact your creditors first. Many may be willing to work with you—lower your interest rate, waive fees, stop late fees—provided that you pay on time, every time. Don’t wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.
If you’re behind on payments to NWFCU, contact us. We may be able to ease your financial difficulties.
Use the members-only free services BALANCE Financial Fitness provides. A BALANCE counselor will review your situation and suggest ways to best deal with your debt. Your options may include adjusting your budget so you can remain or become current with your accounts, a debt management plan, or arranging settlements on your own. To speak with a counselor, call BALANCE toll-free at 1-888-456-2227.
Do your homework! If an offer sounds too good to be true, it probably is. Know what you’re getting into, before you go ahead with any debt plan. The Federal Trade Commission publishes a series of free publications on credit and financial issues, including Fiscal Fitness: Choosing a Credit Counselor and Knee Deep in Debt. To obtain copies, visit ftc.gov/credit or call 1-877-FTC-HELP toll-free.
If you feel you’ve exhausted all other options and you’re still considering a debt settlement program, talk to your creditors first as to whether they will work with the debt settlement company and agree to forgive a portion of your debt before you sign any contract.

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Debt Management vs. Debt Settlement: What’s the Difference?