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Debt Management vs Debt Settlement: Which Is Right For You? » Debt Relief Programs for Every Type of Debt » Debt Management vs Debt Settlement: Which Is Right For You?



People often mistake debt settlement for debt management, or vice versa. Though these debt relief programs have some similarities, they affect your credit and your financial future differently. The biggest difference is how they pay off your debt. Find out who comes out on top in the battle of debt management vs debt settlement.

Debt management vs. debt settlement: What’s the difference?

There are a few differences between debt management and debt settlement. In a debt management program:

  • you roll multiple bills into one lower monthly payment
  • the credit counseling company works with your creditors to reduce your interest rates and stop fees
  • you don’t incur any negative items on your credit report, so your credit score is not affected as it would be with a debt settlement.
  • the nonprofit credit counselors you work with also help you improve your money management skills and help with budgeting

Learn about the pros and cons of debt management »

Debt settlement is about getting you out of debt for the least amount of money possible. In a debt settlement program:

  • you pay less than what you owe
  • a debt settlement company sets up an escrow account to hold payments you make to them
  • once there are enough funds in the account, they contact your creditors with a settlement offer
  • you repay a portion of what you owe and the creditor discharges the remaining balance, but it comes at a cost to your credit- each debt settled will remain on your credit report for 7 years
  • settled debt may be taxable depending on your situation

Discover the pros and cons of debt settlement »

 Debt ManagementDebt Settlement
Effect on creditPositive or neutralNegative
How much principal is repaid100% of principal40-80% (48% on average)
Interest rates (APR)Reduced or eliminatedRates do no factor
Monthly paymentsDistributed to creditorsDivert to monthly set aside
Payoff time36-60 months12-48 months
FeesBased on hardship20%-25% of enrolled amount
Total costPayments reduced by 30%-50%Less than originally owed
Creditor approvalApproved before you startNot guaranteed

Debt management vs debt settlement in real-life situations

If you’re curious about the effects of debt management vs debt settlement on people’s lives, let’s take a look at a few real-life examples. Mary and Noel are real clients of companies in’s accredited network of relief providers. They both owed over $30,000 in credit card debt and used these two common debt relief options to solve their debt problems.

Case #1: Get debt-free the Mary way

When Mary could no longer keep up with her payments, she knew her debt was out of hand. Mary owed $30,440. She was living paycheck-to-paycheck and making only minimum payments. If things got tight, she missed payments. The combination of missed payments and high balances meant Mary’s credit score took some hits.

Her FICO score had dropped to 600, which isn’t terrible. But it isn’t great either. That’s when Mary realized she needed a solution that would make her debts easier to pay off. Unfortunately, Mary’s credit score meant she couldn’t qualify for a debt consolidation loan.

However, Mary enrolled in a debt management program through a nonprofit credit counseling agency. Her goal was to minimize the interest rates applied to her balances, making them easier to pay off. The credit counseling agency worked with her creditors to reduce her interest rates to 6.7%. They also stopped the penalties and fees applied to her account.

Mary’s total monthly payments dropped by 35%! She went from paying $1,217 a month to just $794. This gave her budget the breathing room it needed for Mary to save up for her first home. Mary paid off her debt in full in three years and eight months. The program also improved her credit score by a few points. Once she completed the program, she took steps to quickly boost her credit score and buy her first home.

Case #2: Learn to recover from unemployment like Noel

Noel racked up a heap of debt during a period of unemployment. Without a job, he relied solely on his credit cards to pay his bills. Though he kept a roof over his head and kept the lights on, he could no longer afford to pay his credit card bills.

By the time Noel found a new job, he was waist-deep in a debt hole, owing $30,093. Three of his credit cards had been charged off and sold to debt collectors. The other four cards he owned were months past due and headed for the same fate.

Noel was constantly bombarded with collection calls. Even though he had a new job, he found it almost impossible trying to catch up with his debts. His credit score was down to 450, so Noel just needed a quick debt solution. But he didn’t want to declare bankruptcy.

So, Noel landed on a debt settlement program. With a team of expert negotiators, he got out of debt for nearly half of what he owed – 55% to be exact. Noel only paid $18,548 in total. He was out of debt in 23 months. Though his settled debts will remain on his credit report for seven years, Noel’s fall into collections had already been leading down that path.

In this case, Noel didn’t mind the credit damage because he was finally out of debt. Instead of fending off collectors, he could focus on rebuilding his savings and his credit. With the help of a secured credit card and a credit builder loan, his credit score started recovering within six months.

 Mary (Debt Management)Noel(Debt Settlement)
Starting debt$30,440$30,093
Total paid$34,628$18,548
Time to payoff44 months23 months
Credit impactNeutral7-year notations for each debt settled

Want to see if you qualify for debt settlement? Contact us today.

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Choosing the right solution for you

Now that you understand the difference, it should be easier to choose the solution that fits your situation. If you’re still not sure, you aren’t the only one. Check out these questions readers sent to our personal finance experts:

Question 1: Debt Management vs. Debt Settlement for Low Income

My husband and I are not bad people, but we have close to $40,000 on seven credit cards that there is no way we will ever pay off.

We are not spendthrifts. My husband was offered a lower-paying job when his company merged with another one, and he had to take it since there is no other work in our area. My salary as a secretary does not make up the difference. We earn just a little more per year than we have in debt.

Most of the credit card debt was to pay for home repairs after a severe storm. We do not have flood insurance, so we had to pay for everything to be fixed. Also, we paid for our daughter’s college after she could not get any more federal student loans.

I have read your site trying to understand what would be our best option: debt consolidation, a debt management program, or debt settlement. Do you have any advice?

– Jennifer in Florida

Howard Dvorkin answers…

This is one of the most common questions I’m asked by Americans who are deeply in debt. The terminology is very similar, and the definitions can be hard to understand.

Before I directly answer your question, Jennifer, I want to address the opening words of your email, “My husband and I are not bad people…”

Being in debt doesn’t make you a bad person. Ever. Even if you were financially irresponsible and ran up big bills to buy pricey meals and expensive clothes, you’ve committed no sin. You may have succumbed to temptation, but who hasn’t done that before?

I never judge anyone harshly for getting into debt. I do judge them for ignoring their debts or not learning how to fix the problem.

That’s not you, Jennifer. You fell into debt for understandable reasons, and now you’re asking reasonable questions about climbing out.

Consolidating your debts into one payment may still be too large for you to handle. Debt settlement allows you to pay less than you owe. Your creditors accept the lower amount because they have studied your situation and realize they may end up with nothing.

Question 2: Debt Management vs. Debt Settlement for High Income

It took me a minute, but I figured out the difference between debt SETTLEMENT and debt MANAGEMENT. Now I’m not sure which one to use to get rid of everything I owe.

Here’s the deal: I owe around $45,000 on a bunch of credit cards, which I ran up a couple years ago when I was between jobs. Now I make six figures, but I’m not making much of dent on those cards. The interest rates range from 18 to 22 percent, which is killing me.

I’ve seen examples of debt settlement with amounts as high as I owe, but I don’t think the people who are $45,000 in debt make as much as me. Also, I want to buy a house in the next couple years, since I got this good salary and the job seems really stable. So, I don’t want to settle my debt and then get a crappy mortgage rate.

How do I decide this? What are the factors to consider?

– Paul in Wyoming

Steve Rhode answers…

It’s unfortunate these very different things sound so similar, but in Paul’s case, the question is a little different. It boils down to this: “How much do you consider income when it comes to getting rid of debt?”

It matters a lot. Debt settlement is intended for dire circumstances. Let me tell you a sad story…

Video Transcript
[Get Out of Debt expert Steve Rhodes]

Hi, I’m Steve Rhodes, the Get Out of Debt Guy.

There is a time for debt settlement, and here is an example of when it worked amazingly well. I once had a client. He had $40,000 of debt that he couldn’t pay. He called the bank but the bank wouldn’t give him any help.

If he had gone for the offer that the bank came up with, he would have cleaned out his 401 (k) and had no retirement. He was able to settle that debt for half of what the banks wanted. If you struggle to make payments and are not good with finances like most of us, then having somebody else manage those finances for you and deal with the banks can be a real benefit.

You want to talk to a professional who knows what they’re doing, who can develop a plan that fits within your budget. Who allows you to continue to save money, move toward retirement, and deal with your debt in a healthy, productive, stress-free way.

In this instance, a man endured a personal tragedy that demolished his finances. Debt settlement was literally the only path to preserving his financial future.

Paul’s situation is very different. Even though he owes slightly more than the man I mentioned above, he might not need such a powerful tool as debt settlement. A debt management program is much better for Paul. The “cons” are mostly short-term inconveniences for long-term benefits, which suits Paul just fine. He seems willing to sacrifice now to prosper later.

A DMP, as it’s called, will cut his total monthly payments by 30 to 50 percent, and since he makes a good living, he’ll make quicker progress paying off what he owes.

Regardless of his options – and there are others – the best place to start is with a free debt analysis from a certified credit counselor who works at a nonprofit agency. can hook up Paul and anyone else, regardless of their salary.

Howard Dvorkin is a CPA, chairman of, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.

Steve Rhode is known as the Get Out of Debt Guy and has appeared on FOX, CNN, ABC, NBC, and MSNBC giving money advice.

Contact us today to find out which debt relief solution is right for you.

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