Debt Settlement Vs. Debt Management

Countless reports reveal that the downturn in the economy has made overall consumer debt rise. Accordingly, both debt settlement and debt management solutions have become more prevalent. Both financial strategies can aid consumers in resolving debt dilemmas. Consumers should have a clear understanding of the differences between each to determine which option is best suited for their situation.

Pros of Debt Settlement

Debt settlement plans often aid consumers in reducing their total outstanding debt balances by between 40 and 60 percent by negotiating with creditors on their behalf. Debt settlement has increasingly become the popular alternative to bankruptcy as consumers are often able to get completely out of debt without the stigma of a bankruptcy or creditor charge-offs. In most cases, while consumers are working with a debt settlement agency, the consumer gets rid of harassing calls from collection agencies and/or creditors seeking payment.

Cons of Debt Settlement

A debt settlement company typically charges an upfront enrollment fee prior to any settlement. The funds collected are placed into an escrow account. One major drawback of this strategy is that until the escrow account is fully funded to pay the creditors, the consumers FICO score is affected negatively and the consumer could continue to be subject to collection actions. One final drawback is if any of the creditors refuse to settle, the creditor could seek litigation and/or may attempt to garnish wages upon receiving a judgment against the consumer. For these reasons, many consumers choose to work with their creditors through debt management instead of debt settlement.

Pros of Debt Management

Under a debt management plan, the debt management company negotiates with creditors to reduce the interest rates and late fees on the consumer's account. The consumer makes a specified monthly payment to the debt management agency, and the agency disburses payments to the consumer's creditors. Upfront and/or monthly fees for a debt management plan are typically low and may often be waived if it causes financial hardship. The consumer's account is usually paid in full in three to five years. Being in a debt management plan does not usually affect a consumer's overall FICO score substantially.

Cons of Debt Management

Under a debt management plan, any accounts included in a debt plan usually must be closed. Further, creditors may require that all other consumer accounts be closed and included in the management plan. If during the course of the debt management program, the consumer can no longer afford to make the monthly payments they could be dropped from the program and the late fees, higher interest rate and penalties could be reinstated. Finally, creditors may report that the account is being paid via a debt management program. This could be viewed negatively by persons reviewing the consumer's credit. For this reason, oftentimes a person without a steady income usually chooses a debt settlement program rather than a debt management program.

Conclusion

Both debt settlement and debt management plans offer viable solutions to consumers who experience financial problems. Yet, each plan has certain drawbacks. Accordingly, consumers should weigh each strategy carefully to determine the best fit for their circumstances.