Debt Resolution Strategies: Take Control of Your Finances

Understand the difference between Debt Settlement & Debt Management Plans

Debt can feel overwhelming, and many individuals in financial distress seek strategies to manage or reduce it. Two common solutions for tackling significant debt are Debt Settlement Plans and Debt Management Plans. While both aim to assist in managing debt, they employ different approaches, each with its own advantages and risks. Knowing the distinctions between the two can help you determine which plan is best suited to your financial needs.

Debt Settlement Plan

A Debt Settlement Plan involves negotiating with creditors to pay a reduced lump sum that is less than the full amount owed, effectively settling the debt. This process often involves working with a debt settlement company or negotiator who communicates with your creditors. Here’s how it works:

Negotiation Process: The aim is to persuade creditors to accept a lower payment in exchange for clearing the debt. This usually occurs after you’ve stopped making payments, giving creditors an incentive to settle rather than risk receiving nothing.

Payment Structure: Instead of paying creditors directly, you make regular deposits into a special account managed by the debt settlement company. Once enough funds are accumulated, the negotiator offers a lump sum to settle the debt for less than the total owed.

Time and Cost: The debt settlement process typically takes between two and four years. Debt settlement companies usually charge a fee, often a percentage of the savings achieved, adding to the overall cost.

Credit Impact: Stopping payments will significantly impact your credit score, as you will be in default for a long period before the settlement is finalized. Even after the debt is resolved, the negative marks on your credit report can remain for up to seven years.

Debt Management Plan (DMP)

A Debt Management Plan (DMP) is a structured repayment arrangement offered by credit counselling agencies to help individuals pay off unsecured debts, such as credit card balances, over a set time frame, typically three to five years. Here’s what it entails:

Consolidated Payments: With a DMP, you make a single monthly payment to the credit counselling agency, which then distributes the funds to your creditors. This consolidates your payments without taking out new loans, making the process simpler.

Reduced Interest Rates: Credit counsellors negotiate with creditors to lower interest rates, waive fees, or extend the repayment term, which helps to reduce monthly payments. Although the total debt remains, the focus is on systematically paying it off with more manageable terms.

No Debt Reduction: Unlike debt settlement, a DMP doesn’t reduce the principal balance of your debt. Instead, it focuses on easing repayment by lowering interest and fees, while still requiring full repayment of the debt.

Credit Considerations: A DMP may initially affect your credit score, especially if it involves closing accounts. However, it’s far less damaging than debt settlement. As you make consistent on-time payments and reduce your debt, your credit score could improve over time.

Which one should I choose ?

Choosing between a Debt Settlement Plan and a Debt Management Plan depends on your financial circumstances, payment capacity, and long-term objectives.

A Debt Settlement Plan may be suitable if you’re facing significant debt, have missed payments, and don’t expect to pay off the total amount. However, it carries considerable risks, including potential damage to your credit score and the possibility of legal action.

In contrast, a Debt Management Plan is best if you need assistance organizing your finances, want to simplify payments, and seek relief from high interest rates while still being able to make regular payments toward your debt. This plan is less risky, has a milder negative impact on your credit score, and focuses on complete repayment.