Debt Settlement vs. Debt Management: What’s the Difference?

  • June 18, 2020
  • By: Greenpath Financial Wellness

Credit has become a way of life for Americans.  We depend upon it to buy our homes, cars, education and whatever else we want.  Today, the average American carries a whopping $93,000 worth of debt.

It is so much easier to get into debt than out of debt.  Once in debt, the worst thing you can do is ignore it.  Fortunately, and unfortunately, there are a lot of options available to help you get out of the debt – including credit card debt.

Some options given to get out of debt sound too good to be true.  They are. While the idea of paying off your debt for less than what you owe is tempting, it is by no means a clean slate.


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Debt Settlement

A debt settlement company will try to negotiate with your creditors to accept a lump sum payment that is less than your current balance.  You will be tasked with making regular monthly deposits into an account which will go towards that lump sum payment.  During this time, your creditors are not getting paid, and your credit score is dropping.  Once enough money accumulates in your account, your creditor may agree to take the lump sum, but the story is far from over.

Usually a statement will appear on your credit report noting that you paid less than what was owed, which will negatively impact your credit.  Uncle Sam may consider the forgiven debt as taxable income, and the debt settlement company will collect a fee from you, usually 15-25% of your settled debt.  Keep in mind that if you want to settle your debts, you can negotiate with your creditors on your own.

Debt Management

The goal of a Debt Management Plan is to pay off your debt in full.  Creditors will agree to reduce interest, waive fees, and may re-age your account after a specified number of payments.  In addition, creditors will typically reduce minimum monthly payments.  The plan must be structured to have the debt paid in full within 60 months, by law.

Once enrolled in a plan, regular monthly deposits of a set amount are made to your debt management agency.   The agency will then distribute your funds to your creditors until the debt is paid in full.  Although there may be fees involved, they are usually more reasonable than a debt settlement company.  Debt management agencies are non-profit organizations and fees are regulated by state. They offer a range of debt counseling services.

Next Steps

Before choosing a debt management agency, do your homework.  These agencies can vary greatly as far as their policies and capabilities.

Check out their accreditations.

People have depended upon GreenPath Financial Wellness for over 60 years to overcome their financial challenges and achieve financial wellness.

Learn more about how a debt management plan can give you options for moving forward.