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Debt Settlement Programs vs. Debt Management Plans

Differences Between Debt Consolidation, Debt Negotiation and Debt Elimination Plans

Due to the troubled state of the economy, many consumers are wisely taking extra care to avoid excessive credit debt. Still, credit debt continues to rise overall; last month, consumer borrowing rose by $1 billion.

Many of us are struggling with debts we’ve carried for some time, so being prudent about our future borrowing doesn’t help us address our existing debts. To do that, we have some different options, including solutions like bankruptcy, debt management plans, and debt settlements.

Let’s look closer at two of those options debt settlements and debt management plans.

With a debt settlement, the debtor or a representative offers to settle an outstanding debt with the creditor for an amount less than owed. The creditor may accept the settlement offer, or they may reject it, depending on the circumstances of the debt. If the debtor is using a debt settlement negotiator, there is typically a fee charged up front, which is charged whether the settlement is accepted or not.

Under a debt management plan (DMP), the debtor works with a credit counselor to create a workable budget that will allow the debt(s) to be paid in full in 5 years or less. The creditor negotiates concessions that may include lower interest rates, lower fees, and re-aging the account so future payments aren’t considered late. A credit counselor typically offers counseling for free, and charges a modest set-up fee upon enrollment in a DMP.

So you can see some of the key differences between debt settlements and debt management plans:

  • With a debt settlement, there is no guarantee the creditor will accept a settlement offer. They may even take the debtor to court if the debt is significant enough.
  • A debt settlement has serious negative consequences for one’s credit score. Your credit report will reflect that the debt is “settled for an amount less than owed.” Only declaring bankruptcy does more damage to one’s credit rating than a debt settlement. With credit counseling, a client usually graduates from a debt management plan with better credit than they started.
  • Settlement negotiators often charge hefty fees up front; credit counselors provide counseling free of charge. With counseling, there is no obligation, and the majority of clients who don’t even enroll in a debt management plan benefit from understanding their finances, creating a budget and gaining access to resources that benefit their personal finances.
  • A settlement negotiation is usually considered adversarial; creditors may opt to sue a debtor with significant debts rather than consent to a settlement. A debt management plan, on the other hand, is a cooperative endeavor; a three-way partnership between client, counseling agency and creditor to resolve outstanding debts.
  • Many professional debt settlement negotiators will advise a debtor to stop sending payments to their creditors and instead make monthly deposits  with the settlement agency, where they will accrue over time until there’s enough to make a settlement offer. In the meantime, the debtor continues to receive constant negative notations on their credit report, collection calls, and possibly a default judgment and wage garnishment. In a debt management plan, all payments are forwarded to the creditor on time, which helps to improve one’s credit score as regular monthly payments come in.

Where does one start when seeking help on credit debt issues? Our advice is to seek credit counseling before making up your mind – the counseling session is free and there is no obligation to enroll in any further service. The advice you get from a qualified nonprofit credit counselor will help you make up your mind about your next step.

We think consumers seeking counseling should look for certain qualifications, like COA Accreditation, BBB membership, and if there are any issues with one’s mortgage loan, HUD approval.

If after talking with a nonprofit credit counselor, one still wants to explore a debt settlement, seek an agency that doesn’t charge fees before service; that is, find someone who only gets paid if the debt settlement offer is accepted. A responsible debt settlement negotiator should also disclose very clearly certain risks of debt settlement:

  1. It will severely damage one’s credit
  2. The settlement offer may be rejected
  3. The creditor may initiate legal action against the debtor
  4. The settlement negotiation process may take some time to complete
  5. Any amount saved in a settlement will be reported to the IRS as taxable income

It’s especially crucial that settlement negotiators carefully prepare clients for the tax obligations that a debt settlement brings. If the settlement negotiator fails to disclose any of the risks of a settlement, they should be avoided. We also recommend asking the settlement negotiator if they have attorneys on staff who will represent a debtor if s/he is sued by a creditor.


04/19/2010 7:47 pm test

test comment

04/19/2010 7:50 pm test


04/23/2010 12:11 am admin

Interesting article, however I have to disagree on the research points.

05/01/2010 1:22 pm admin

Rajat Test

05/17/2010 9:19 am admin

This is a very interesting article.

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