Debt Management vs. Debt Settlement

August 24th, 2010 Jackson Colson Leave a comment Go to comments

Getting out of debt can be a tricky proposition. There are a number of programs that purport to help work through your debt issues, but you need to be careful. While some can provide needed assistance, others are little more than scams. One of the distinctions you should make when deciding what debt plan to go with is that between debt management and debt settlement. It is important to note that your mortgage obligation is usually not included in these types of arrangements.

Debt Management

With debt management, you have a third party help you create a repayment plan for your debt. You pay down the principal at a reduce interest rate, and possibly with your fees waived. Interest you have accumulated to the point of debt management is usually added to the principal. You make one payment to the (hopefully reputable) debt management company, and the company makes payments to your creditors. What you pay to the management company is figured based on how much you are paying to your creditors, plus administrative fees charged by the company, and what your budget can handle.

Debt Settlement

Another option is debt settlement. These services are generally advertised as a way for you to pay less than you owe. The debt settlement company sets you up on a payment plan, so that you pay the company, and not your creditors. Your money accumulates in an account during this time (while your credit score plummets, since you aren’t making debt payments to creditors), and the company begins negotiating with your creditors. They try to settle your debt for a specific amount, which may not cover all you owe. However, you usually have to pay up front fees for this service, and not all of your creditors may agree to the debt settlement offer. (They may not agree to the debt management, either.)

Do It Yourself

Of course, there is another option: You can handle a debt repayment plan yourself. If you are having trouble making your payments, you can call your creditors individually and negotiate lower interest rates, as well as work out a repayment plan. While it might be easier to hire someone else to manage your debt repayment plan, the truth is that you can do many of the things that third parties do on your own. However, it requires a little time and planning.

You can also engage in aggressive debt reduction with the help of a debt snowball type plan. This way, you are still making your payments on time, and your credit score is not suffering. One of the issues with getting involved with debt management and debt settlement programs is that you may have to close your accounts, and the payments from the company may not always arrive on time. Even if you negotiate a payment plan with your creditors yourself, you may be required to close a current credit account — something that may affect your credit score.

If you are concerned about your credit score, and you have enough to keep making payments, you might set up a debt snowball (or avalanche or whatever) to more quickly pay down your debts. And if you have been a good customer, you can even try to call and ask for a lower interest rate, so that more of your payments are going to principal.

Before you decide on a course of action related debt repayment, it is a good idea to consider your goals, and study the consequences of debt settlement, debt management, and doing it yourself.

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