Debt Settlement vs. Debt Management: Which Option Is Better?
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Debt Settlement vs. Debt Management: Which Option Is Better?

Getting into debt may have been easy, but getting out of it can be much harder. If you’re considering debt management or debt settlement, you should know the facts about both. While debt settlement may seem like a good idea, the truth is that it’s risky. 

 

Why Is Debt Settlement Risky?

Debt settlement companies are third-party, for-profit companies that work to get your lenders to reduce your overall payment so you pay less than you owe. However, they’ll first advise you to stop paying on your loans completely, with the theory that your lenders would rather you pay a smaller payment than nothing. Your accounts will become increasingly delinquent during this time, earning you late fees and penalties. Late payments can stay on your credit score for up to seven years, so your score will also take a significant hit. 

Credit companies are not obligated to settle and may even sue you, which can result in your wages being garnished. Additionally, debt settlement companies charge 15%–20% of each settled debt, so even if these tactics work, you’ll pay high fees. 

 

Why Debt Management Is the Better Option

Debt management plans (DMPs) are programs nonprofit credit counseling agencies offer to help you pay off unsecured debt. While you’ll be required to pay a small fee of $40–$75 to cover the cost of your program, these certified agencies are required by law to offer free budget counseling and financial education services. When you enroll in a DMP, a counselor works with your lenders to consolidate your loans into one monthly payment (often reduced by 30%–50% of what you owe) with a reduced interest rate (down to about 6%–10%). DMPs are designed to be paid off in three to five years, so you can pay down your debt quickly and efficiently. You can’t open new credit cards during this time period, which allows you to recover your financial health while boosting your credit score. 

 

Bottom Line

While both debt settlement and debt management can help you pay down unsecured debt like credit cards, personal loans, and medical bills, a debt management plan can help you pay your debt off quickly without putting you in more debt or hurting your credit score.

 

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