Debt Management vs. Debt Settlement

Debt Management vs. Debt Settlement

Understanding key differences between two debt relief options

One of the most common misconceptions about a debt management program is that it’s the same as a debt settlement program, that those are two terms that refer to the same type of program. The programs are significantly different. They have two different end goals and offer two sizably different ways out of debt.

With that in mind, we’ve created the table below to help you understand how the two programs differ and what exactly they do. If you still have questions or need help determining the best path out of debt in your unique financial situation, we can help. Call Consolidated Credit today at 1-888-294-3130 or complete an online application to request a confidential debt and budget analysis from a credit counsellor at no charge.

Comparing two debt relief programs

Debt Management ProgramDebt Settlement Program
Will this help me pay back everything I owe?Yes. The program pays back everything you borrowed – you just do it in a way that’s easier on your budget at reduced interest rates.No. You settle your debt for less than the full amount owed by making a settlement offer for a percentage of what you owe to erase the remaining balance.
Does this help me make monthly payments to my creditors?Yes. You make one payment to a credit counselling agency each month. The agency then distributes it among your creditors on a negotiated schedule.No. Instead the money you would use to make monthly payments to your creditors goes into an account to generate the funds necessary for your settlement offer.
Will this stop future penalties from being applied to my debts?Yes. Once the creditor agrees to the adjusted payment schedule, all future penalties stop because you’re making payments as agreed unless you don’t make payments and fail to complete the program.No. Late fees and penalties may still be assessed on the accounts since you won’t be making payments. However, since you’re settling for less than you owe anyway, the impact of such penalties is reduced.
What happens to my interest rates?They’re reduced or eliminated. The credit counselling agency calls each creditor to negotiate interest rate reduction; rates go down to 0-11%.Interest charges usually cease by this time. Most settlement offers are made to a debt collector, meaning the original credit card account was already charged off and sold to a collector. Debts in collections do not accrue interest. If you are settling an open credit line, interest charges would be applied until you make the offer and close the account.
How are fees assessed on the program?Based on budget, set by federal/province regulations. There is a setup and monthly maintenance fee assessed based on your budget and what you can afford. Costs are also set and capped by province regulations.Fees come after all parties agree. By law, the settlement company cannot collect fees until they have settled at least one debt on your behalf; charges are contingent on the debt and number of settlements reached.
What happens to my credit?Neutral or positive credit impact. As long as you keep up with program payments, the program will not harm your credit. Since you build a positive credit history and reduce your total debt, people often see their score improve as a result of completing the program.Negative credit impact. Each account that will leave a negative item on your credit report for settling the debt for less than what you owe; the remark remains in place for seven years from the date of the final account settlement. This is likely to make lenders consider you a high-risk borrower.

Debt Management vs Debt Settlement: Making a Choice

Going with Debt Management

Depending on your perception, a debt management plan can leave you better off in the long run. Referring to the chart above, you can save money with both. However, paying off debt through a DMP can only help your credit.

When you go the DMP route, it may mean:

  • You cannot handle the amount of debt you currently have
  • Most of the debt you have is on credit cards
  • A balance transfer credit card is not an option
  • You work well with a structured program and help from a professional organization

Going with Debt Settlement

When you settle your debt, it’s usually a result of credit card debt that you can no longer keep up with. Your credit score has already gone down, and collections agencies likely have your debts. Paying off debt can be a pain, but collections can be even more troublesome.

Going with a debt settlement company might mean:

  • Your accounts are in collections
  • You have enough money to offer a lump sum payoff

Review the pros and cons of each with one of our trained credit counsellors. Both debt management and debt settlement can help you get out of debt. It’s a matter of choosing one that’s right for you.

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