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Pros and Cons of Debt Settlement vs. Debt Management
The Pros:
Debt Settlement
When you settle a debt, you are relieved of a portion of your
obligation. Collection agencies routinely agree to settle a debt
for 40-60% of the balance. You can save substantially if you
negotiate a good settlement. Once a settlement has been
completed, the collector may no longer pursue the debt through
collections or legal channels (judgment).
Debt Management
Debt management allows you to reestablish and maintain a
current payment status on each of your accounts. You can get
relief from your debt through
lower interest rates, lower
minimum payments and a break from fees. Your credit history
is updated to show a current payment status on each account as
your creditors agree to re-age your accounts. When you complete
your debt management plan
(DMP),
you no longer owe those debts and your credit history is much
stronger, accounting for the responsible way that you recovered
from your high debt balances. The Cons:
Debt Settlement
You must be able to pay the settled amount immediately in one
lump sum. Payment plans are not allowed. Debt settlement
companies offer a payment plan where they hold your money
without paying your creditors until they can negotiate a
settlement. You pay a sizable enrollment fee to open your
account. Meanwhile, you also pay a hefty monthly fee.
Once one account settles, then you must often pay the
settlement company a percentage of the "savings." Any "forgiven
debt" of at least $600 is automatically reported to the Internal
Revenue Service and is generally taxable as a form of income. By
the time you settle, your credit has been ruined, and it will
take an additional 7 years to restore it.
Debt Management
Sticking to a debt management plan is not easy. It takes
dedication and discipline. In addition, you are expected to
avoid using credit cards while you are enrolled in a DMP. Most
creditors will not allow you to keep more than one card off for
business purposes.
If you are considering one option or the other, speak with a
credit counselor today to see how each option might benefit you.
In general, as long as you have accounts with the original
creditor, you are almost always better off utilizing a debt
management plan to eliminate your credit card debt. If all
accounts are charged off and turned over to collection agencies,
then settlement could work for you. If you consider settlement,
understand that you can do this on your own without utilizing
the services of a debt settlement company. Feel free to
contact one of our Accredited
Financial Counselors for more information. |
