Debt Settlement vs Management

Both debt settlement and debt management can be used to get out of debt. However, there are a few differences between the two. These differences must be appreciated before you can decide whether to opt for debt settlement or debt management to become debt-free again.

Debt Management and Debt Settlement

Debt management involves negotiating with your creditors for a lower interest rate on your debts. You also try to get the creditors to subtract late fees that you have accumulated on your account. However, you still have to pay the principal in full.

Debt settlement, by contrast, involves negotiating with your lenders to allow you to make a partial payment of the total money due in return for a complete release from the remaining balance. This option is usually examined just before bankruptcy declaration.

Debt Settlement versus Debt Management

So it should be clear that while debt management only renegotiates the interest and late fee, leaving the principal untouched, debt settlement reduces the principal that you have to pay back. This is the primary difference between debt management and debt settlement. The other differences flow from this fundamental difference.

Debt Settlement

A debt settlement leaves your credit score a few notches lower, and it can take up to seven years to get your credit score up again. If you use the services of a debt settlement company, as many people who seek debt settlement do, the company will typically ask you to make monthly payments to it. The first few checks are used to pay the debt settlement company. The other checks are then used to pay the creditors the reduced negotiated amount.

The catch here is that the debt settlement company will advise you to stop paying your creditors for a few weeks or months. During this time, your credit rating will plummet. This low credit rating will haunt your credit scores for years to come. So be wary of going into debt settlement unless and until your only other option is to file for bankruptcy. The creditors will write "settled" against your loan and not "paid in full." This is the difference in terminology that will reveal your poor credit history.

Another point to note about debt settlement is your income tax liability. If the creditor forgives you more than the prescribed limit, you will have to pay income tax on the balance amount.

Debt Management

Unlike in the case of debt settlement, a debt management plan ensures that you pay your dues in full. This leaves you with a better credit score. The creditors will write "paid in full" against your dues, and your credit history will at the most say that you went in for debt management. However, this will not affect your credit scores in any way. You will also find that collection calls stop after some days of entering a debt management plan. This is something else that will make you heave a sigh of relief.


If you have a stable income source, opt for debt management rather than debt settlement. Only if your income has become erratic because of job loss or some such event should you go in for a debt settlement plan. 

Both debt settlement and debt management are options that help you to regain a stress-free life by getting you out of debt. You have to examine the pros and cons of each and choose the option best suited for your needs. In most cases, debt management is a lot better than debt settlement and should be the option that you examine first. Only if you are unable to successfully negotiate and stick to a debt management plan should you opt for a debt settlement plan.

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