In 2018, the average American held $38,000 in debt (excluding mortgages). The sobering truth is that some of these people will never get out of debt â€” in fact, 13% of respondents in the study said they believe they will be in debt for the rest of their lives. Perhaps youâ€™re in significant debt thatâ€™s been mounting for years and youâ€™ve decided itâ€™s finally time to tackle it. Youâ€™ve heard about both debt management and debt settlement, but donâ€™t really know what either entails.
Below, weâ€™ve broken down the difference between debt settlement and debt management so you can decide which method is right for you.
|Â||Debt management||Debt settlement|
|What is it?||A nonprofit credit counseling agency communicates with your creditors and helps you come up with a debt repayment plan.||A for-profit company attempts to lower your total debt by negotiating your debts with your creditors on your behalf.|
|How much does it cost?||On average, between $25-$50 per month. (There could be a small enrollment fee, but this should be less than $75.)||18% to 25% of the total enrolled debt, plus potential other enrollment and account maintenance fees.|
|When is it useful?||
|Are there credit requirements?||No.||No.|
|How long does it take?||It varies, but typically between 3 to 5 years.||It varies, but typically between 3+ years.|
|Are there tax implications?||No.||Yes. You might have to pay taxes on your forgiven debt.|
|Will it affect your credit?||It could. Enrolling in a program itself does not affect your credit. But if you close credit cards as part of the plan, that could affect your credit. However, consistently making monthly payments will likely improve your credit score.||Yes. If you enroll in a debt settlement program, your credit score will likely take a major, lasting hit.|
|Is it guaranteed to work?||If you stay on track with your monthly payments, it will work.||No. There is no guarantee that a debt settlement company will be able to negotiate your debts.|
Debt management involves working with a nonprofit credit counseling agency to pay off your debt over the course of a specific time frame â€” typically three to five years. The process is fairly simple: Once you enroll in a program, you make one monthly payment to your agency, which then gets distributed to your various creditors.
Below, weâ€™ve broken down everything you need to know about debt management so you can decide if itâ€™s the right option for you.
A debt management program helps a consumer manage his or her unsecured debt. You simply make one monthly payment to the agency, and they disperse that payment to your various creditors, according to Katie Ross, Education, Development & Housing Manager at American Consumer Credit Counseling. Typically, credit counseling agencies can negotiate to get lower interest rates on oneâ€™s debts.
â€śThe benefit of being in a debt management plan is that agencies like ours help people get back on financial track,â€ť said Ross. â€śWe can help them better their credit card debt by working with their creditors to reduce their interest rate and their payoff time.â€ť
Credit counseling agencies typically offer financial education with their programs, which can help consumers avoid getting into debt again. â€śYouâ€™re getting ongoing counseling and youâ€™re getting financial education to learn how to manage your money and stay on track,â€ť Ross added.
Debt management is typically a good decision for consumers who are ready to tackle their debt but donâ€™t want to take on something as serious as debt settlement or bankruptcy.
Those who meet the following criteria might benefit from debt management:
The monthly fees associated with a debt management program are typically low. Ross said monthly fees are driven by state regulations (some have licensing requirements and some donâ€™t) and therefore they vary.
Regardless of the state you live in, the fees should be minimal. â€śMake sure that the fees are reasonable and theyâ€™re not exorbitant, and thereâ€™s no hidden fees anywhere,â€ť Ross said.
In addition, Ross said many credit counseling agencies will be willing to work with consumers who cannot afford enrollment fees. â€śIf thereâ€™s a financial hardship, the agency needs to be willing to waive the fee or reduce a fee,â€ť she said.
|Enrollment||This fee should not be more than $75.|
|Monthly maintenance||This fee is typically between $25 and $50 per month, and should not exceed $50.|
Typically, a debt management program lasts from three to five years, according to Ross.
There are a handful of scenarios in which pursuing a debt management program makes sense. If the following statements apply to you, you might want to consider it.
If youâ€™re interested in enrolling in a debt management program, Ross advises checking for the following things when looking for a credit counseling agency to work with:
Debt settlement involves working with a for-profit company to have your debts negotiated. The idea is that by working with a debt settlement company, your debts will be negotiated to a lower amount and youâ€™ll have less to pay.
Unfortunately, the debt settlement industry is rife with scams, and thereâ€™s no guarantee any of your debts will be settled. If you pursue this route, itâ€™s imperative to do your due diligence. Read on for everything you need to know about debt settlement.
Consumers partner with a debt settlement company â€” sometimes referred to as a debt relief firm â€” who will attempt to negotiate the consumerâ€™s unsecured debts to a lower amount. Each month, the consumer puts money in an account that is designed to pay off this negotiated amount once it is reached.
There is no guarantee that your debts will be negotiated, but if they are, it could be by as much as 50%.
You will likely need a minimum amount of debt to enroll in a debt settlement program. It depends on the firm, but minimum requirements are typically between $7,500 and $10,000.
Debt settlement could be right for you if you have significant debt and you donâ€™t anticipate being able to pay this debt off within a few years. It should be thought of as a last resort.
Those who meet any of the following criteria could consider debt settlement:
Upfront costs vary with debt settlement. Some firms have no upfront costs at all. The primary form of payment is in program participation fees, as the firm will take a percentage of the total debt youâ€™ve enrolled in the program.
|Program participation fees||18% to 25% of total enrolled debt.|
|Miscellaneous fees||Firms could charge additional maintenance and setup fees.|
It varies, but typically debt settlement lasts for three years or longer. It depends on the total amount of debt enrolled in the program and how long the negotiation process takes. Some programs will advertise that it could take as little as six months, though this is not typically the case.
Considering debt settlement? If any of the following statements applies to you, it could be worth considering.
If you decide debt settlement is the right path for you, there are a handful of things you should be aware of:
The debt settlement industry is not regulated and therefore it is rife with scams. If youâ€™re interested in partnering with a debt settlement company, itâ€™s important to do your research and vet the company. Check with the BBB to make sure the company has no complaints filed against them. You can also check to see if complaints have been filed with the stateâ€™s attorney generalâ€™s office.
It depends on your personal situation. If the debt you hold can be paid back in a reasonable time frame, you want to take a safe path, and youâ€™re interested in learning about how to build healthy financial habits, debt management is likely the right decision for you.
However, if you hold an immense amount of debt, but bankruptcy is not in the cards, debt settlement could be worth considering.
Regardless of the path you choose, here are some steps to help get you started:
Youâ€™ve taken the first step toward becoming debt-free, which is deciding youâ€™re ready to buckle down and get started. From there, the most important thing is to do ample research and figure out which debt repayment strategy is best for you. Before you know it, youâ€™ll be well on your way to becoming debt-free once and for all.
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