Large debts always make people feel trapped, or like they don’t have an option. I understand that trying to make enough money to be financially free may sound like a joke, especially when you’re fighting to pay bills and your credit is already hit. However, there’s some good news — Debt management and Debt settlement!
Here, let me help you understand the difference between debt management and debt settlement so that choosing the right option for your career becomes easier.
[1] What is Debt Settlement
There are circumstances where huge amounts of debt look like they need to be settled perfectly. It has an ‘exit strategy’ in the sense that the debts can be cleared at a discount on the actual amount.
However, one has to know all the steps of the procedure to the smallest detail. Even though these agencies provide this service, they are business organisations that work on a commission basis, taking between 15 and 20% of the agreed balance.
They stopped making more payments to creditors and negotiated in order to raise the possibility of getting lump-sum pay instead of no pay at all.
Here’s the truth: If you default in paying your bills, delinquencies, and late fees, which take up to 7 years to be removed, your credit score will be lowered. Also, it is possible not to receive approval from creditors for a proposal for a negotiated payment because it may be disadvantageous to you. They may also use legal actions such as topping wages.
Although debt settlement is something that can influence your future events, it is definitely doable. One should not rush to make such a decision without weighing all the available options.
[2] What is Debt Management
An effective solution to your unsecured debt problems could be a debt management plan (DMP), which covers personal loans, credit card debt, and medical expenditures. A DMP is a type of credit repair that can be reached with the help of a debt management company; it focuses on reasonable payments rather than on debt elimination.
Nevertheless, this can create a negative impact on the credit score. In addition to the DMP, these organisations offer free counselling and are devoted to creating financial literacy.
This is how I find it to operate: Through a credit counsellor who makes arrangements with my creditors, I join the program. The objective? I need to pay off my credit card debt in full each month, usually with a 30–50% reduction! The payback period for this simplified payment plan is 3-5 years.
During this time, I am not allowed to establish new credit accounts, but my main goal is to pay off my current debt and maybe raise my credit score by making regular, on-time payments. With expenses that usually only run between $40 and $75, a DMP is an affordable way for me to take back control of my finances.
[3] Comparison: Debt Management Vs Debt Settlement
| Basis | Debt Settlement | Debt Management |
| Impact on Credit Score | Negatively impacts your credit score (for settling debt/missing payments) | Never impacts your credit score when you sign a debt management plan |
| Best For: | Unsecured form of debt | Unsecured form of debt |
| Timeline | Varies. It may take up to 4 years | 3 – 5 years |
| Cost | 15-25% of the borrowed amount. Other charges are applicable, too. | $20 – $75 per month fees. |
| Risks Involved | Not every creditor accepts or collaborates with debt settlement. | Access to credit cards or new lines of credit won’t be available. |
| When To Consider | Behind payments. None of these options work: neither DMP nor debt consolidation. | Need improvement in credit score. You cannot afford or qualify for debt consolidation. |
[4] Conclusion: Which Is Better?
To sum up, it is for the reasons stated above that your financial situation and goals will be the deciding factor. Thus, if the goal is to pay off the debt as quickly as possible, bearing in mind its creditworthiness, a debt management plan offers a clear direction.
This strategy can assist you in attaining a financially independent status at a faster rate since it tends to focus on the aspects of easy payment and perhaps lower interest rates. However, you should understand that a credit counsellor can help you throughout the procedure and ensure that you’re making the right decisions at each stage.
