If you’re looking to climb out of debt and considering a debt settlement plan vs. a debt management program, you should know the benefits and potential downsides of both before getting started.
What is a debt settlement program?
A debt settlement program allows you to get out of debt while paying a fraction of what you owe—but it comes at a cost. Like anything that sounds too good to be true, when you enroll in a debt settlement program, you’ll be instructed to stop paying on your monthly payments. During this time, you may end up with more creditors calling you than before, and you’ll get hit with late payments and a tanking credit score.
The goal of this is to get your creditors to agree to a lesser payment than what’s owed. Once paid, they will settle your debt, but your credit score will reflect this for up to seven years.
If you already have dents in your credit score and another hit won’t make a difference, you risk your creditors not agreeing to the settlement. This could end up with you more in debt than where you started. Lenders may also choose to file a debt collection lawsuit against you.
What is a debt management program?
A debt management plan is a debt repayment program that can help you pass less in interest, reduce your payments, and combine your unsecured debt into a single - affordable - monthly payment. These debt repayment plans are designed to be paid off in three to five years. Your certified credit counselors can also help you learn to revamp your budget as well as provide help developing better habits when it comes to your finances.
With a debt management plan, you don’t have to worry that you’ll be hurting your credit—instead, you’ll be helping it by paying down your loans.
Although paying less than you owe may seem like the better deal, consider that there’s no guarantee with debt settlement and the impact it will have on your credit score, as well as your ability to get a line of credit later. Debt settlement is a last resort option, while debt management is a healthier choice for financial recovery.