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People often confuse debt management and debt settlement, and these debt relief strategies have some similarities. Both usually involve making monthly payments that could be less than your current monthly bills. Yet, they affect your credit and your financial future very differently. Learn how each one works before choosing what’s right for you.

debt management vs debt settlement; illustration of people looking for something on different paths

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

The biggest difference between debt management and debt settlement is how they pay off your debt. Put simply, debt management means you’re finding a way to pay off all your debt while debt settlement means finding a way to pay less than what you really owe.

Another difference is that in some cases, you can negotiate a debt settlement agreement on your own (although we recommend working with a debt settlement company). Debt management, on the other hand, is handled through a credit counseling agency while working with a certified credit counselor.

Debt Management Pros and Cons

Starting a debt management plan means putting your credit on hold for a while and focusing all your finances on paying off debt. All your accounts are frozen when you enroll in the program and you can’t get new credit cards while you’re enrolled. You start debt management programs after first talking with a credit counselor. This can either be through a for-profit or nonprofit credit counseling agency. The goal of the program is to reduce or eliminate the interest charges applied to your debt. You pay back everything you owe, but do it in a more efficient way.

Learn about the pros and cons of debt management »

Debt Settlement Pros and Cons

Depending on your amount of debt and your current financial situation, debt settlement could be a better option for you. It will get you out of debt relatively quickly and you pay less than what you owe. This sounds great until you hear about the hit your credit will take. Your credit scores could drop close to 100 points when you start a debt settlement program, and it could remain on your credit report for seven whole years.

Read more about the pros and cons of debt settlement »

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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…

[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. Debt.com can hook up Paul and anyone else, regardless of their salary.

Howard Dvorkin is a CPA, chairman of Debt.com, 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.

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Article last modified on July 15, 2019. Published by Debt.com, LLC