Debt Settlement Versus Debt Management

Confusion exists in the marketplace about debt settlement versus debt management. The two processes are completely different, but consumers can mix them up when faced with competing claims. Lowering interest rates on debt payments or reducing the total debt owed both sound attractive to the unwary debtor. The truth is that these claims have completely separate and very distinct effects on a debtor's credit report.

Debt Management

Debt management plans are the forte of credit counseling agencies. These entities are often nonprofit organizations. Legitimate credit counselors spend 45 minutes to an hour with each debtor, going over various options. At the end of the counseling session, the debtor should receive a written plan with specific actions to take. The counseling itself is typically free, and all fees are stated in advance and should not exceed $40 per month at most. The debtor will make monthly payments to the credit counseling agency, which will disburse the payments to creditors. All accounts with outstanding balances are included in the plan, and once they are paid off, they are closed. Collections attempts typically stop a month or two after the plan is enacted.

Entering into a debt management plan by itself does not affect the debtor's credit score, though many lenders will view your enrollment in one of these plans as a sign you are financial distressed and may not lend to you.

Debt Settlement

Debt settlement companies are very different in their goal is to reduce your debt, not just interest charges. Client make payments into an account held by the debt settlement company to be paid to creditors, but instead of disbursing the payments on a monthly basis, the funds accumulate for several months and are paid to the creditor in a lump sum equal to less than you owe to satisfy your full balance. So while the savings achieved can be very significant, there is an impact to one's credit score because the accounts are considered delinquent until they are settled. During this time, creditors also continue collection efforts, and it is possible a creditor can pursue legal action.

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