If you’re being harassed by your lenders or collection agencies, you may be wondering which would be of most help – a debt management plan or debt settlement. While both options could help, each has its own pros and cons.
How To Get A Debt Management Plan
Debt management plans (DMPs) are usually offered by what’s called consumer credit counseling agencies. The best of these agencies are nonprofits such as the National Foundation for Credit Counseling (NFCC) and Money Management International (MMI). The NFCC has member agencies in most cities and towns. Money Management International has branch offices in many areas. If you can’t find an NFCC or Money Management International office near you, you could go online and find one. However, it pays to be careful of online credit counseling companies as some of them are outright frauds.
How a DMP works
The goal of a debt management plan is to help you manage your debts until you can get them paid off. Once you have chosen a credit-counseling agency, it will analyze your finances and help you create a debt management plan. Your counselor would then work with your creditors to restructure your debts and reduce your interest rates to make your payments more affordable. Nonprofit agencies usually offer a free initial one-hour consultation and then charge a minimal amount such as $25 per month until you have completed your plan.
The pros and cons of a DMP
A debt management plan is a form of debt consolidation in that once your lenders sign off on your plan, you won’t be paying them any longer. You’ll pay the credit-counseling agency instead. This means you would make just one payment a month, which should be lower than the payments you’re now making. The downside of a debt management plan is that you would have to surrender all your credit cards and not get any new ones until you finish your plan. You will also have to make all of your monthly payments when they are due or your plan could be canceled.
How debt settlement works
A debt settlement company will negotiate with your creditors to get your balances reduced so that you would typically be out of debt in 24 to 48 months and pay back only a fraction of what you owe.
The pros of debt settlement is that it’s the only way to get your debts reduced, which usually means getting out of debt quicker than with a debt management plan. You wouldn’t be harassed by lenders or debt collection agencies any longer and would make only one payment a month, which in this case would be to the debt settlement company. The cons or downside of debt settlement is that you would have to stop making payments to creditors and this would definitely affect your credit score. However, the damage would not be as severe as if you had filed for bankruptcy.
Debt management versus debt settlement
Which of these would be your best option? That’s a decision only you can make. However, many families have found that debt settlement is a better solution as it’s a way to get debts reduced. In comparison, if you owed $15,000 and chose credit counseling, you’d still owe the $15,000 and it would definitely take you longer to pay it off then if you had your balances reduced to $7,500.