Debt settlement vs. debt management

Debt settlement and debt management can facilitate debt payoff, but they’re not for everyone

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When you’re dealing with a mountain of debt, it can be hard to envision digging your way out of it. Considering that Americans’ credit card balances increased by $50 billion in the last quarter of 2023, it’s no wonder many are looking for debt relief. If a complete debt payoff seems inconceivable, it may be time to consider other tactics to ease the burden, such as debt settlement or debt management.

Debt settlement and debt management both typically involve creating a new payment plan and sending a single payment to a third party, but there are different benefits and downsides to each. With debt settlement, you hope to have a third party negotiate a lower payoff amount. With debt management plans, a credit counseling agency helps you organize a payment plan.

Key insights

Debt settlement and debt management are two strategies available to assist borrowers facing a high amount of unsecured debt.

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With debt settlement, you either negotiate with creditors on your own or work with a debt settlement company to try to reach an agreement to pay a lesser amount.

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Debt management plans (DMPs) are a form of debt consolidation you can enact by working with a consumer credit counseling agency.

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Both debt settlement and debt management can be helpful for those with unmanageable debt, but there are risks to consider.

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What is debt settlement?

Debt settlement is one way to move past overwhelming debt. The goal is to negotiate with creditors so they accept less than you actually owe. Cameron Burskey, managing director at Cornerstone Financial Services in Southfield, Michigan, explained, “Debt settlement can help people with debt avoid bankruptcy by providing an alternative way to address their financial obligations.”

You can pursue a do-it-yourself debt settlement in which you contact creditors individually and request a balance reduction or other form of relief. You’ll need to be able to compile a percentage of the balance to offer as a lump sum in exchange for releasing you from the remainder of the debt.

You can also choose to work with a debt settlement firm, which negotiates on your behalf to try to lower your debt. However, per the National Foundation for Credit Counseling (NFCC), “Professional debt settlement is generally considered to be a risky and ill-advised debt repayment scheme.” Some creditors won’t negotiate with debt settlement companies, and there are fees to consider along with likely damage to your credit.

The biggest drawback to debt settlement is its impact on credit scores and your financial reputation.”
– Cameron Burskey, managing director

In fact, according to Burskey, “The biggest drawback to debt settlement is its impact on credit scores and your financial reputation.” Your credit will drop, largely because you must stop payments while the settlement firm negotiates with creditors. Once the settlement is completed, it typically remains on your credit report, which impacts your ability to get financing for several years.

You will likely be able to eventually raise your credit score by making on-time payments and avoiding additional borrowing. However, consider not only the credit impact but the actual cost of debt settlement, as these firms charge between 15% and 25% of your enrolled debt, which cuts significantly into any savings you might receive through negotiation.

Debt consolidation vs. debt settlement

Debt consolidation involves rolling multiple debts into one. You can take out a debt consolidation loan that combines debts and leaves you with a single monthly payment, which can simplify your debt repayment process. Credit card balance transfers may accomplish this as well. Consolidation doesn’t reduce your outstanding debt.

On the other hand, debt settlement means you typically end up with a single payment to a settlement firm. You need to come up with a larger lump sum, but it may be much lower than what you actually owe.

Consolidation can be a welcome source of relief, helping you to pay off debt more quickly due to the lower interest charges instead of reducing the debt itself. However, there may be risks, especially if you put your home up as collateral. But you can avoid harming your credit since consolidation doesn’t show up as a negative mark on your credit report.

Debt resolution vs. debt settlement

It may be confusing to encounter so many similar-sounding terms when searching for debt relief options. Debt resolution is another way of discussing debt settlement, so keep this in mind when you’re exploring possible solutions. Both refer to engaging a third party to try and negotiate your balance down, which is not guaranteed.

» MORE: Best Debt Settlement Companies

What is debt management?

The term debt management may sound like a generic personal finance tactic, but it refers to programs that can help people pay off debts with potentially lower overall costs. Consumer credit counselors may offer a debt management plan (DMP).

Nonprofit credit counseling agencies communicate with your creditors, which can make a debt management plan sound a lot like debt settlement. But if you sign up for a DMP, your credit counselor won’t try to get creditors to take a lower payoff amount. Instead, they aim to get other benefits such as reduced interest rates or waived finance charges.

Credit counselors should not push a DMP as your sole option, but offer it only if it makes sense for your circumstances and goals.

Under a DMP, you’d set up an account with the credit counseling agency and make regular deposits there. The agency works with your creditors and handles sending the payments.

You may benefit from debt management if you’re seeking a simpler way to organize your debt payments and the chance to pay off your debt in full. A large amount of debt owed to multiple creditors can be difficult to track, and a DMP may provide the structure needed to move forward confidently in repayment.

Be sure to vet your credit counseling agency and counselor before choosing this path. Burskey suggested that a reputable credit counseling agency meet the following guidelines:

  • Accreditation by the NFCC or the Financial Counseling Association of America (FCAA)
  • Transparency in fees and services
  • Verified counselor credentials and agency reputation
  • Non-profit status that may indicate a client-centered focus

Debt settlement vs. debt management: Pros and cons

Both debt settlement and debt management come with their own advantages and drawbacks. Both can result in faster debt relief and simplified payments, but they also come with fees and the risk that not all creditors will work with you.

Debt settlement pros:

  • Potential to save money: You may end up negotiating to pay less than the amount you owe.
  • Avoid bankruptcy: You can avoid the “more severe consequences of bankruptcy, such as asset liquidation or long-lasting negative impact on credit scores,” said Burskey.
  • One monthly payment: Pay one fixed amount to the debt settlement firm, which will use those funds eventually to pay a negotiated amount to creditors.

Debt settlement cons:

  • High fees: Fees to settlement firms can eat into the savings from a reduced balance.
  • Credit score damage: Because you typically must cease payments during negotiations, your credit score will drop initially.
  • Taxable income: Any forgiven debt may be taxable.
  • Risk of failure: Debt settlement isn’t guaranteed to work, since many creditors refuse to negotiate with settlement companies. Additionally, consumer advocacy agencies caution borrowers against working with them.

Debt management pros:

  • Simplified payment: Make one monthly payment to your credit counseling agency, rather than having to juggle multiple creditors’ payments and due dates.
  • Financial guidance: A reputable credit counselor can provide invaluable financial guidance throughout the process.
  • No harm to credit: Debt management won’t cause your score to drop. Plus, according to the NFCC, on-time payments to a DMP can eventually improve your credit score.
  • Potential lower fees: Credit counselors aim to get you better terms and lower interest rates.

Debt management cons:

  • Fees: Nonprofit doesn’t mean free, so you’ll pay fees to the agency handling your DMP.
  • No credit access: You typically can’t use credit while enrolled in a DMP.
  • Unsecured debts only: Only certain unsecured debts are eligible for a DMP.

Overall, both debt settlement and debt management can lead to saving you money and simplifying your payments. You may also get out of debt faster with either one, although you’ll pay fees to either a debt settlement firm or a credit counseling agency.

» MORE: Debt consolidation vs. debt settlement

Which debt solution is right for you?

When you’re faced with credit card debt or other unsecured debt that has ballooned out of control, it’s natural to want a way out. Debt settlement and debt management are two major methods of handling debt that you may come across. However, you shouldn’t enter into either of these programs without careful consideration.

As Burskey said, “When choosing between debt settlement and a DMP, consider your ability to make regular payments versus your need for significant debt reduction.” A DMP works best for consistent monthly payments, while debt settlement is better for someone who needs their total debt balance to drop.

Evaluate your debt

First of all, tally up your current debts. Remember that debt settlement and debt management are primarily for unsecured debts like credit card balances.

Figure out how much you owe each of your creditors and look at other factors like their interest rates and other fees. You’ll also need to examine your income and expenses to determine whether you can cut any unnecessary spending to funnel that money toward debt.

On your own or with a certified credit counselor, look closely at your finances to figure out what you can reasonably pay on your debt. A larger balance may indicate that you’d benefit from a debt settlement company negotiating your balance down, while debts that charge high interest rates may be better served by working on a debt management plan.

Consider the impact on credit

One of the major considerations of debt settlement is the likely ding to your credit score. Because you must stop payments in order for settlement companies to negotiate on your behalf, your credit will suffer in the short term. Credit will also be affected long-term because a settled debt doesn’t look as positive on your credit report as a debt that is paid in full.

If credit is a major concern, a debt management plan may be preferable. Although you have to stop using credit during the DMP, making regular, on-time payments can eventually raise your credit score.

That said, credit scores aren’t everything, and if your debt is severe, it shouldn’t be your first priority in deciding how to proceed.

Plan how to manage your finances

Regardless of whether you choose debt management, debt settlement or another form of debt relief, you need to think about how you handle your money. Determine what your goal is. Getting your total debt reduced is different from easing the interest charges so you can gradually repay the full amount.

Remember that neither debt settlement nor a DMP is a magic bullet that will erase your debt. You still have to put in the work to address the reasons for your debt and aim to prevent falling into the same patterns after completing any kind of debt relief program.

Get professional guidance

If you’re struggling to decide the best steps for achieving financial stability, you may want to consult a professional. Burskey noted, “Seeking support from credit counseling agencies or financial advisors can provide valuable insights and assistance in navigating the debt repayment journey effectively.”

Working with a credit counselor involves thoroughly examining your financial situation to come up with feasible options. Credit counselors aren’t only for debt management plans, either. The FTC warns that you shouldn’t work with credit counselors who promote debt management plans as the only possible solution (especially not without first evaluating your debt situation).

Be wary of dealing with anyone who claims to want to help you but really wants to earn a commission. Remember that the Consumer Financial Protection Bureau (CFPB) has warned that debt settlement is risky for a number of reasons, including the potential for fees to actually add to your debt load. Tread carefully.

Could your debt be reduced or forgiven? Take our financial relief quiz.


    How long do debt settlement and debt management programs usually take?

    The timelines for debt settlement and debt management programs are fairly similar. Debt settlement can take three to four years, and DMPs can take three to five years, according to the NFCC.

    Can debt settlement or debt management help with all types of debt?

    No. Whether you choose settlement or a DMP, only unsecured debts are generally eligible for these types of payment programs. However, select agencies may offer debt settlement services for other specific types of debt, such as student loan debt or medical debt.

    Are there any tax implications with debt settlement?

    Debt that is forgiven through debt settlement may result in taxable income, so be sure to factor the additional tax burden into your calculations of savings through debt settlement. Consider consulting a tax advisor or tax attorney on this matter.

    Bottom line

    While it’s tempting to hope debt settlement or debt management will instantly solve your financial woes, keep in mind that both come with their own set of risks. Both types of debt solutions typically involve trusting a third party, whether a debt settlement firm or a credit counseling agency, and making monthly payments to them.

    If you pursue either debt settlement or debt management, you’ll be on the hook for fees and a hit to your credit. Your creditors are also not obligated to agree to these plans. Be cautious and only consider these types of debt relief solutions as a last resort if your debt is insurmountable.

    Article sources

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

    1. Consumer Financial Protection Bureau, “What is a debt relief program and how do I know if I should use one?” Accessed March 14, 2024.
    2. Federal Reserve Bank of New York, “Household Debt and Credit Report.” Accessed March 18, 2024.
    3. National Council on Aging, “What is a Debt Management Plan?” Accessed March 14, 2024.
    4. National Foundation for Credit Counseling, “Does Debt Settlement Make Sense For You?” Accessed March 14, 2024.
    5. National Foundation for Credit Counseling, “What Is a Debt Management Plan, and How Does It Help?” Accessed March 15, 2024.
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