If debt has become a problem in your life, you’re probably considering a number of different options for dealing with it — and several ways that you have discussed with your financial counselor. If you haven’t you should. Two of the most common ways to work debt are credit management and debt settlement. While both have certain elements in common, they also diverge in rather significant ways.
While either approach can help you get your debts back under control, there are definitely times when you’d choose one over the other. With all of that to consider, you’re probably wondering: Which is better, credit management or debt settlement?
What Is Credit Management?
You should have a consultation with a credit counselor before entering a credit management program. They can provide help in terms of learning to establish and live within a budget, as well as saving and planning for financial challenges. Perhaps the best way to think of a credit counselor is as a financial coach who will help you learn to handle your money more effectively.
Credit counselors also examine your situation to determine its severity and offer other alternatives to help you get things back on track if it looks like a debt management program (DMP) isn’t warranted.
If it’s determined a DMP will be beneficial — and you agree — you’ll hand over control of your debts to the counselor who will contact your creditors to negotiate interest rate and fee reductions on your behalf. The manager will also take over the actual payment of your bills from a fund into which you make a single deposit each month. Because of this aspect of a DMP you have to choose the program with which you work very carefully. There are a lot of people out there who will see your vulnerability as an opportunity to take advantage of you.
Ideally, you’ll choose to work with a non-profit credit-counseling agency, such as the National Foundation for Credit Counseling (NFCC), or Money Management International (MMI).
What Is Debt Settlement?
You’ll work with a consultant at a debt settlement agency like Freedom Debt Relief. This person will also evaluate your situation and negotiate with creditors on your behalf. However, in addition to fee and interest reductions, they will ask for forgiveness of a portion of the principal balance you owe in exchange for timely payment of the amount the creditor agrees to accept.
After enrolling in a settlement program, you’ll typically stop making monthly payments to your creditors ahead of the negotiation process. Instead, you’ll deposit funds into an account you control from which your creditors will be paid as settlement agreements are reached. It’s important to note settlement usually only works with unsecured debt — so car loans and mortgages are exempt. Certain types of student loans are immune to settlement programs as well.
Debt settlement companies are almost always for-profit organizations. However, the law prohibits them from requesting payment until they’ve settled a debt on your behalf. Still, you do need to vet them fully, as it’s very possible for a firm to take your money, leave your debts unpaid and disappear into the ether. The best debt settlement companies are affiliated with organizations such as the American Fair Credit Council.
So, Which Is Better: Credit Management Or Debt Settlement?
It really depends upon your case, the nature of the situation, and specifically, how far gone your debts are. Debt management is likely to be your best bet if your obligations are primarily credit cards and your accounts have yet to go to collections. Debt management can also be helpful when you can’t get a consolidation loan, a balance transfer or a personal loan to restructure what you owe.
Debt settlement should be considered when all of the above apply to you and your unsecured debt accounts are severely delinquent and/or in collections. With that said, settlement will usually leave you in a better position than filing for bankruptcy.