Difference between the Debt Management and Debt Settlement

When you start getting difficulties and troubles in your life due to bad debt, you look for options to overcome these financial problems. Debt management, often known as credit counseling and debt settlement, also known as debt negotiation are the two most common methods of debt relief. But people always get confused with these two terms.

So before considering the options for debt relief, you should understand the difference between these two.

Debt Management or Credit Counseling - Debt Management or Credit Counseling is a professional service provided by various debt management companies or qualified professionals to repay your bad debt. It can also educate you about credit, budget and managing your financial obligations.

The debt management companies prepare a structured repayment plan, which will fit into your budget after evaluating your current financial status. This repayment is negotiated with each of the creditor, which results in lowering of your interest rates. Once the creditors agree to the repayment plan, you will have to deposit a single payment into a particular account every month. This amount will be distributed among the various creditors according to the proposed plan.

Thus, Debt Management is a long term plan, where you have to repay the full amount of debt with lowered interest rates.

If you are considering debt management for your bad debt relief, you need to have a steady income, and also you should be able to spare some amount of your income for making payments.

Debt Settlement - Debt Settlement is an agreement between debtor and the creditors. A debt settlement company works as an agent for the debtor; they negotiate with the creditors in order to settle the debt for less than what the debtor owes. So with the debt settlement, you can reduce your actual amount of debt you owe rather than the interest rate. The companies charge an upfront fee for their debt settlement services.

Thus, debt Settlement is a short term plan, where your have to repay only a part of your debt. Debt Settlement is considered as one of the fastest debt relief methods, usually completing the debt in around two years.

If you are going for debt settlement, you will have to stop payments for several months, making your account default so that your creditor will be convinced of your need for debt settlement.

But this will hurt your credit score. And also, you might have to pay tax, as the amount which has been forgiven by the creditors, will be considered as income and will be subjected for tax.

Which one is a better option for you?
This depends upon your financial status. If you are knee deep in debt and, unable to cope with the payments, debt settlement is for you. If your debt situation is not that bad, then you can opt for debt management.

If you want quick relief from debt and also want a considerable amount of saving, you can choose debt settlement. And, if you just wish to consolidate all your payments into one for simplicity, you can go for debt management or credit counseling.
Both of the options have their own pros and cons. So you have to decide according to your need.