Market Overview

Breaking Down the Big Differences Between Debt Management, Debt Settlement

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Take Charge America explains the financial impact of two popular debt
repayment strategies

Excessive credit card debt can be overwhelming, and the repayment
process is often difficult to navigate. There are numerous routes, each
with very different short- and long-term repercussions.

Two of the most popular strategies are debt management and debt
settlement. While they sound similar, these programs take different
approaches to eliminate debt.

  • With a debt
    management plan
    , a credit counselor from a nonprofit agency works
    on the borrower's behalf to obtain more favorable terms with each
    creditor, such as reduced interest rates and finance charges, and
    waived late and over-limit fees. Once agreed upon, the borrower makes
    a single monthly payment to the credit counseling agency. The agency
    then disburses payments to all creditors, taking the guesswork out of
    which card or loan should be paid off in what manner.
  • Debt
    settlement
    is performed by for-profit companies, which direct
    clients to halt payments as a tactic to get creditors to accept a
    lesser amount in a lump-sum payment. Instead, the client sets up a
    separate savings account where they can deposit money to ultimately
    settle the debts. Once the lump sum payments are accepted, accounts
    are considered satisfied.

"With any repayment plan, it's imperative to conduct research so you
understand the fees and risks," said Michael Sullivan, a personal
finance consultant with Take Charge America, a
national non-profit credit counseling agency.
"Comparing the
services side by side will help you identify the right path to financial
freedom."

Sullivan breaks down nine key differences between debt management and
debt settlement:

  1. Objective Advice – Nonprofit credit counseling agencies must
    abide by strict regulations to ensure they have clients' best interest
    at heart. Debt settlement agencies are for-profit entities that don't
    necessarily offer objective advice.
  2. Education – Debt management includes a robust educational
    component. You'll leave the program with a better understanding of
    money management. Debt settlement doesn't focus on education.
  3. Monthly Payments – With debt settlement, you'll redirect all
    payments for up to 36 months into a separate savings account until
    your debts are settled. This can negatively impact your credit score,
    force your debts into collections or even lead to a lawsuit. Further,
    all the missed or delinquent payments will stay on your credit report
    for seven years. Debt management takes a different approach – you make
    one monthly payment toward your debt, based on your budget, which is
    distributed to your creditors.
  4. Total Repayment – If it works, debt settlement can clear 50
    percent of your debt or more. Depending on your life situation, this
    benefit might outweigh the negative consequences. However, there is no
    telling if/when it will work. With debt management, plans are
    typically paid in five years or less without the negative credit
    impact.
  5. Interest Rates & Fees – In debt management, certified
    credit counselors work with your creditors to secure lower interest
    rates and fees. With settlement, late fees and other penalties are
    added onto your balance.
  6. Credit Score – Debt settlement negatively impacts your score
    because payments are missed and accounts aren't paid in full. Debt
    management doesn't impact your score in the same manner because
    payments are submitted to creditors throughout the program.
  7. Fees – You'll pay for both programs, but debt management has a
    smaller impact on your wallet, requiring a nominal monthly fee based
    on your state of residence. By law, debt settlement companies can't
    charge upfront fees. But, they will charge a percentage of the amount
    of enrolled debt, generally 18 to 25 percent.
  8. Collection Calls – Debt settlement programs typically don't
    stop pesky collections calls. Debt management programs do.
  9. Tax Charges – While debt management programs don't incur
    additional taxes, you may have to pay additional taxes with a debt
    settlement program. The IRS considers forgiven amounts over $600 as
    income, for which you may owe taxes.

Learn more about these debt repayment options:

About Take Charge America, Inc.

Founded in 1987, Take Charge America, Inc. is a nonprofit agency
offering financial education and counseling services including credit
counseling, debt management, student loan counseling, housing counseling
and bankruptcy counseling. It has helped more than 1.6 million consumers
nationwide manage their personal finances and debts. To learn more,
visit www.takechargeamerica.org
or call (888) 822-9193.

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