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The Difference Between Debt Management and Debt Settlement

Carl Andrews

Financial Advisor

The Difference Between Debt Management and Debt Settlement

When people are struggling to handle their debt, they need to know the difference between two possible solutions known as debt management and debt consolidation. These are two very different financial strategies. The goals associated with each of them are also very different. Before choosing one, a person should know all of the issues associated with them.  

Debt Management

According to Investopedia, this is when a company designs a plan that makes it possible for an individual to repay all of their debts with a single monthly payment. In this situation, individuals are working with a debt management company to devise a debt management strategy. The people who use these companies will pay them a fee.

Advantages Of Debt Management

These programs are designed so provide structured principle repayment plans. This makes it possible for a person to repay their debt faster than if they weren't on such a plan. A person will benefit from fees being waived as well as having a lower interest rate on their debt. There will no longer need to be regular payments sent to each of a person's creditors. They can send a single consolidated payment to their debt management company. It is then the company's responsibility to send payments to each of the creditors on their client's list. The debt management company will send their clients a month statement. It will show their account activity and balances. A person can then easily monitor their progress.

Disadvantages Of Debt Management

Unless a person is in a financial position to make regular monthly payments, this program won't work for them. Should a person miss a single payment, or make a late payment, a creditor can quickly remove them from this program. Should this happen, it will put them back in the same position of struggling with debt as when they started the program. It's possible for a person to have so much debt, they are unable to benefit from a debt management program. These programs are designed to help people with their debt by making regular monthly payments for the up to 60 months. It is possible for a person to have so much debt that even with decreased interest rates, and elimination of fees, they won't be able to finish paying their debt within a program's time frame. Some companies providing this service are nonprofit, and many others are not. It's possible for a company to charge high fees for their service. This may be deducted from a person's monthly payment. This means their entire payment won't go to paying their debt. Many nonprofit companies do not charge such fees.  

Debt Settlement

According to, this financial strategy is designed to do away with some or all of a person's outstanding debt. This strategy comes with a price. It involves a person negotiating their debt and making specific arrangements with each of their creditors. The goal in this situation is for a person to pay less than what they owe on their debt. Doing this will result is a person experiencing a significant decrease in their credit score. When a debt settlement is on a person's credit report, it could harm their ability to obtain a loan in the future.

Advantages Of Debt Settlement

The impact on a person's credit score will not be as severe as if they had filed for bankruptcy. This could be a very cost effective way of handling debt as a person will not have to pay the entire principal amount of the debt. This is also a good way to avoid the need to liquidate assets that would be required in a bankruptcy.

Disadvantages Of Debt Settlement

In this situation, a person has to be up to four months delinquent on all of their accounts, or their creditors will not be willing to negotiate such a settlement. All of the debt that is forgiven will be taxable. A person can also be charged high fees by third-party providers. There is no requirement for a creditor to agree to this type of debt settlement offer. A debt settlement agreement is a gamble. Should a few of an individual's creditors not be willing to settle the debt, they may be in a situation that is even worse than when they started trying to get settlement agreements.  

Which is the Better Option: Debt Management or Debt Settlement?

For those neck-deep in debt and in general, a perfectly hopeless situation where there seems to be no light at the end of the tunnel, debt management and debt settlement are proven methods to get out of this agony. After all, a debt burden is the most troublesome among all liabilities, and no one likes creditors hounding them at all hours of the day or night. Debt management and settlement are two of the most viable methods to find a way out. However, they differ in terms of their character, advantages, and disadvantages.

Debt Management:

Debt management is done through careful planning whereby a payment schedule is constructed first. This, in turn, consolidates all your unsecured and credit card debts into an affordable and single monthly payment. Those getting into debt management programs are legally bound to stop using their credit cards and get reduced interest rates which makes their monthly payments more affordable. The additional advantage is that when the debt management program is under a non-profit debt consolidation agency which works more for the benefit of its clients rather than its own personal gain, a borrower usually ends up repaying his debt within a period of three to five years. Under a debt management plan, as a borrower, you make a single consolidated monthly payment to a 3rd party, which is usually an agency for credit counseling, instead of paying off all your creditors individually at an average interest rate of 8 to 12% over a three to five year period. This helps you pay off the debt faster through lowered interest rates irrespective of your credit score; stops calls from creditors for collection; eliminates over-limit and late fees charges; and, more importantly, construct a practical and realistic budget along with a financial plan that you can stick to easily. The process starts with a session on credit counseling which can be done personally with a trained and experienced credit counselor or even online or over the phone and takes anything between 25 to 60 minutes. Consequently, your debt’s root cause is identified and a household budget is worked out accordingly based on your credit report which contains the relevant information on your outstanding balances as also the requirements for monthly payments. Following this, the credit counselor will give you suitable loan repayment options based on your debts and current income. Enrollment into a suitable debt management program happens immediately after you qualify for enrolment and you are given the privilege of using any one credit card just for emergencies.  

Debt Settlement:

When you opt for debt settlement, your debt actually gets reduced instead of just being moved around. Here, instead of paying your lenders, you transfer money on a monthly basis to an escrow account till a reasonable amount accumulates in that account. Once this happens, the debt settlement firm contacts any one of your creditors to start settlement negotiations and ultimately reduce your debt by 40 to 50 percent. However, this service comes with a hefty fee that all debt settlement companies, being for-profit organizations, charge their clients and which may range between 15% and 25%. However, in spite of this, it stands to be a better option for coming out ahead. The only noticeable downside is that debt settlement severely damages your personal credit score.

Pros & Cons of Debt Management

Debt management as is often seen is a suitable option to regain control over your finances, enhance your credit rating and help you save yourself from bankruptcy. On the flip side, however, it comes with certain downsides and risks. Thus, it becomes extremely important to study and understand its pros and cons before selecting a solution to your debt situation.



  • All your debt payments pertaining to credit cards get rolled into one monthly payment. This, in turn, makes it easier for you to manage your debts within your budget because you just have to make one payment that covers all your unsecured debt.
  • The rates of interest that apply to your outstanding is considerably lower. Credit cards generally tend to have high-interest rates in excess of 20 percent. Therefore, the appropriate option for debt management typically reduces the interest rates applicable to your debts to about 10 percent or even less.
  • You get the privilege of paying off your debts much faster. This is due to the fact that the interest rates are lower; and each payment made erodes your primary debt instead of draining away on additional interest charges. This makes it possible for you to pay off the full debt within a few years or maybe even less, instead of decades altogether it would take if you stick to a schedule of minimum payment.
  • You get to bypass credit damage. As you manage your debt, you actually stay ahead of credit damage. Consequently, you avoid any potential damage to your credit score that comes with missed or late card payments as also with defaulted accounts. By doing this, you also manage to avoid bankruptcy, which may make your credit score drop to below 600 and make you vulnerable to non-receipt of other types of financing.
  • Your debt management agency sends you monthly statements that show your account’s balances and activities. This helps in monitoring your progress.




  • If the debtor uses credit before paying off the managed debt, he gets into a deeper debt trap. With some existing options, certain existing accounts may have zero balances making them usable from the first day. This may tempt the debtor to start using his cards again. Even if his accounts stand frozen because he’s already in a debt management program, he may still be in possession of other credit cards and be in a position to open and use new accounts. Accumulating further debt before the consolidated debt is eliminated can be dangerous!
  • If the payoff plan isn’t working, it will be back to square one. Once the debt is under a management program, the debtor needs to stick strictly with his payment plan and ensure that all payments are made on time. Otherwise, they definitely risks damaging their credit and is most likely to face extra penalties. In certain cases, if his creditors erased penalties while adding interest when he or she consolidated, these stand to be taken into account again if the debtor fails to keep making payments.
  • The question that now arises is: Once the debts are paid off, will the debtor manage to stay debt-free for the rest of his life? This is where another major problem of debt management comes to light: Debt management loans are completely incapable of changing the basic behaviors of debtors who hit the debt trap in the very first place. Instead, what it actually does is to add another unwanted creditor to the debtor’s existing pile, thus enhancing the chances of the debtor of getting into additional debt to repay more debt.
  • Those with huge amounts of debt don’t really benefit from debt management programs because such programs are usually designed to span 60 months at best. If your debt amount is so high that in spite of getting lower fees and interest rates, you still can’t afford to pay off your full debt, the debt management program really doesn’t work.
  • Should you press the button for a debt management agency that is profit-oriented, you could end up paying higher fees and charges.


Advantages of Debt Settlement

When you press the button for debt settlement, you are inviting a negative impact on your credit score. However, this negative impact is not as acute as a bankruptcy filing. Debt settlement is usually cost-effective when it comes to resolving debt, since the total principle amount of the debt is not required to be paid. Moreover, debt settlement helps in avoiding asset liquidation by way of bankruptcy.

Disadvantages of a Debt Settlement Program


  • For debt settlement to take hold, the debtor’s accounts must be delinquent within a minimum of three to four months or their creditors won’t be willing to negotiate.
  • Any debt that is forgiven is taxable, and this often leads to substantial erosion of the debtor’s overall savings.
  • 3rd party debt settlement service providers often charge very high fees that can add to the debtor’s woes.
  • All creditors may not agree to a debt settlement agreement and are not legally bound to accept the same either. The choice they make is strictly according to their own discretion.
  • Debt settlement has often been called a gamble because if your creditors don’t want a settlement, you become vulnerable to lawsuits for recovery of debt, which could worsen your financial situation even further.


The Final Verdict

Debt management enables you to repay the entire debt through lowered interest rates and waived late fees along with a guarantee of being absolutely debt free within three to five years. This is what gives debt management a head start over debt settlement. Debt settlement on the flip side involves working with a lawyer to negotiate lower debt amounts and also making payments monthly to accumulate the pay-off amount. Moreover, your creditors may not accept your settlement proposal and your personal credit score can take a severe beating when you fail to make payments regularly as negotiations go on.

Carl Andrews

Carl has years of experience helping people tackle debt. As a Senior Financial Advisor, he knows the ins and outs of debt consolidation and debt management. He holds a Masters Degree in Finance and according to him, not all debt problems are the same and that’s why it’s important to take a look at the different options available for your situation.