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Debt Management Program or Debt Settlement: What’s the Difference?

The road to financial freedom can seem like an impossible climb. It may also seem like there are too many paths. How do you choose the right one? Consumers researching repayment strategies  often find two debt relief options: enrolling in a debt management program (DMP) and seeking debt settlement. These options share similarities, like using a third party to distribute funds. Additionally, there are usually some kind of negotiations with creditors. While they resemble one another, debt settlement and a DMP are very different. Learn more about these repayment  options to make the best choice for your personal finances.

A debt management program could be right for you.

A debt management program could be right for you.

Debt Management Program

First, let’s quickly outline a debt management plan. A DMP consolidates your bills without borrowing more money. You do not take out any more debt to pay for existing debts. You make one monthly payment to the agency you have chosen to work with. Your money is then distributed on your behave to your creditors.

A credit counselor at a non-profit credit counseling agency, like ACCC, will review your financials over the phone. There are several possible outcomes to improve your finances and reach your goals. Creating a new budget, entering into a DMP, and filing for bankruptcy are a few examples. Let’s focus on the debt management program.

A DMP is only available to those who complete a credit counseling session. Even then, the counselor must determine if this is an appropriate option. Not everyone qualifies. In this plan, the agency will secure lower minimum monthly payments or lower interest rates from your creditors, making repayment more feasible and affordable for the debtor. Any accounts entered into a debt management program must be closed. Your payments will be consolidated into one that is paid to the agency, and they disburse to each credit account.

Here are some benefits of a DMP:

  • One monthly payment
  • 24-hour member access
  • Lower payments
  • Get out of debt faster
  • Re-counseling
  • Financial education 

Credit Counseling Explained

Credit counseling is a process where a certified personal finance counselor reviews your financial situation. They provide education and advice on how to better manage your finances. There is a complete budget analysis to determine all your income and expenses. The cause of the debt is determined and possible repayment solutions are examined. An accredited credit counseling agency can help an individual determine the best repayment option. They also offer educational resources to help you better manage your personal finances and avoid problems in the future. Agencies typically offer free counseling, only charging fees if you opt to enter a debt management plan.

Debt Settlement

Now, let’s talk about debt settlement. Debt settlement is a negotiated reduction of your owed balance. Creditors typically won’t consider accepting a settlement until you are a few months past due for payment. That means you must first do damage to your credit report. One of the biggest drawbacks of a debt settlement plan is the impact on credit. Regardless of whether your settlement arrangement is successful or not, your credit rating will be severely damaged for several years.

Keep in mind that your creditors are under no obligation to settle your debt for less than what you owe. And because debt settlement involves not paying your bills for a number of months, you may end up with additional penalties and interest, legal bills, and calls from collection agencies. In addition, it can be expensive, too. You may pay as much as 25% of the money you save to the settlement company. Additionally, the portion of debt that is “settled” can count as income, and you may be taxed on it.

How Debt Settlement Works

Let’s say your creditors will go for debt settlement. A lump sum payment is made to your creditors. If you don’t have the funds for a big payout, a debt settlement company can set up a third party trust account in which your money can accumulate. Then you essentially follow common debt management advice and make payments to the settlement company instead of your creditor for a few months. Once your savings have built up, you negotiate.

The debt settlement company will take a percentage of the agreed upon amount. Accounts reported as settled score negatively on your credit report until paid in full. Even then, your report will contain negative information from the previous missed payments.

Debt settlement may help you get out of debt quicker and for less than the total amount you currently owe. The representative from your settlement company will handle the communications with your creditors. This will relieve you from the responsibility of some difficult conversations.

Debt Management Program or Debt Settlement?

There is no quick way out of debt (unless you win the lottery!). It’s not a decision that you should make lightly. Additionally, you must work with your partner or spouse moving forward. If you aren’t on the same page, you may find yourselves back in debt.

Both of the options presented here are quite involved. They are meant to tackle large amounts of debt that the borrower cannot manage alone. While debt settlement can be quicker, it does not provide guidance, education or a structure moving forward toward healthier financial management.

Each of the debt repayment options has it’s pros and cons. Since everyone’s situation and finances are unique, there is no answer suited for everyone. No matter which option you choose, you need to research the organizations along the way. This is especially important to do before signing on for any repayment plan. You can do so by looking them up on the Better Business Bureau. For credit counseling agencies, you can also check with the Association of Independent Consumer Credit Counseling Agencies (AICCCA).

Understanding Your Financial Habits

Once you have chosen a debt repayment strategy, it’s critical to make some serious life changes. The way you feel about money and use it on a daily basis probably needs to shift. Typically, debt does not build up overnight; there are many, many decisions that cause debt to spiral out of control. Changing bad spending habits will help secure a debt-free future.

Here are some essential tips to keep in mind to avoid overspending:

  • Before going shopping, make a list of items you’d like to purchase and don’t deflect from it!
  • Keep track of your purchases and spending in a thorough budget.
  • Set SMART goals.
  • Analyze your spending triggers – ask why.
  • Wait on all major purchases. Take a day or two to really think through the necessity of the purchase and how it might affect your other goals.
  • Make saving a priority.

Finally, speaking with a financial professional is always recommended to help with debt problems. An agency such as American Consumer Credit Counseling can offer free credit counseling sessions. Working with professionally certified counselors can help you consider all your options, and choose the most advantageous path out of debt.

If you’re struggling to pay off debt, ACCC may be able to help. Sign up for a free credit counseling session with us today. 


Michelle is a regular contributor to Talking Cents. She has taken several financial courses on debt management and is ready to circulate what she has learned from them as well as lessons from her own life- family to DIY projects to student loan debt.

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