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If you are having trouble managing your debts, having trouble making payments on time, or considering filing for bankruptcy, you may want to seek professional financial help. Two options for debt relief available to consumers are debt settlement and debt management programs.
Depending on your financial situation, you may benefit from debt management, debt settlement, or some other form of debt relief, such as debt consolidation. Debt management and debt settlement options have pros and cons. Before you take one route or another, make sure you understand how debt relief works and the difference between debt settlement and management plans.
Here’s what to expect from debt management and debt settlement plans and how each affects your personal finances.
Debt management programs, also known as Debt Management Plans or DMPs, are a service offered by consumer credit counseling agencies. Credit counseling agencies are non-profit organizations that help people who are having difficulty managing their debts but want to avoid filing for bankruptcy. Most of their services are provided at low cost or free of charge to you as a customer. Credit counseling agencies are partially funded by creditors.
When you sign up to work with a credit counseling agency, in addition to your debt management program, you receive personal financial coaching and advice on budgeting, managing your money more responsibly. and your credit and building a better financial future.
A debt management program gives you a fresh start and an increased focus on paying off your debt. The credit counseling agency will work with your creditors to negotiate a lower monthly payment to cover all of your debts, while waiving fees or lowering your interest rate if possible. In exchange, you agree to repay the full amount of your debt over a period of months or years. Most people on a debt management plan are able to pay off their debt within three to five years.
Why You Might Choose Debt Management
There are several good reasons to choose a debt management plan to help you get out of debt:
- A monthly payment. Credit counseling agencies help you by giving you a monthly payment that combines all of your debts. You pay the agency this lump sum each month, and then the agency pays your creditors separately. Having just one monthly payment can help simplify your finances, and the credit counseling agency is on your side to work with your creditors.
- To save money. Credit counseling agencies can work with your creditors to negotiate lower interest rates, get fee waivers, and help save you money on debt repayment. As a result, the new monthly payment you make as part of your debt management plan may be lower than what you paid before. This can free up space in your budget to help you build emergency savings or meet other financial goals while getting out of debt.
- No damage to your credit. Being on a debt management plan can help you build or restore your credit history. Your accounts are credited with 100% of the payments you make over time. If you have a less than perfect credit history due to late payments or excessive debt, debt management can help you get a fresh start.
Alternatives to debt management
If your debt is at a manageable level and you don’t want to commit to a multi-year debt management plan, or if you have good enough credit to qualify for another loan, you may want to consider debt consolidation. debts instead. With debt consolidation, you can choose to combine your debts by paying them off all at once with a new loan, such as a personal loan from your bank or credit union, or by using a credit card with balance transfer. at 0%.
Debt consolidation can help you get out of debt faster by lowering your interest rate. But not everyone may be able to qualify for a lower APR debt consolidation loan. If your credit is low and you are having trouble making your payments, you may need to consider what many consider a last resort – debt settlement.
Debt settlement is a form of debt relief where people try to renegotiate the amount of debt they owe and ask their creditors to accept a lower repayment. This can be done by the individual creditor or by using the services of a debt settlement company.
Instead of paying the full amount you owe (like you would with a debt management plan), debt settlement involves “paying off” the debt for less than what you owe. Settling debts can be risky and hurt your credit. It should only be considered as a last resort for people in severe financial distress.
Why You Might Choose Debt Settlement
There are several reasons for choosing debt settlement:
- Cannot or does not want to file for bankruptcy. If you are unable to file for bankruptcy, debt settlement may be an option of last resort.
- Can’t or won’t apply for a debt consolidation loan. If your credit is low and you don’t qualify for low interest debt consolidation loans or balance transfers, debt settlement may meet your needs.
- Ready to accept damaged credit. The debt settlement process will leave you in arrears on your payments and damage your credit. If your credit is already low, or if you’re willing to take a hit on your credit as part of your long-term plans to rebuild your finances, debt settlement may be a valid option.
Debt settlement is not suitable for every situation because of the risk and credit damage involved. Yet, in some circumstances, debt settlement may be worth pursuing.
Alternatives to debt settlement
Debt settlement will hurt your credit, so you can find a better solution to your financial problems by talking to a credit counseling agency and choosing a debt management plan.
Or, if you have enough credit to qualify for a lower interest rate loan or balance transfer, you may want to consider debt consolidation rather than debt settlement.
Debt Management Vs Debt Settlement: Which Is Better?
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Frequently Asked Questions (FAQ)
Can I negotiate a credit card debt settlement on my own?
Yes, you can settle your debts on your own, but it can be complicated, risky, and damaging to your credit score. Plus, debt settlement forces you to be past due on your payments, which hurts your credit history and stays on your credit report for seven years. If you’re having trouble paying your bills, you can start by talking to a nonprofit consumer credit counseling agency.
What percentage of a debt is generally accepted in a settlement?
A successful debt settlement usually results in the payment of 50 to 80% of the original balance. But this is not guaranteed; creditors will not always agree to negotiate. Also, if you hire a debt settlement company, they will charge a fee (typically 15-25% of your total listed debt) that you will need to pay with your savings. (And the forgiven debt becomes taxable income, with a few exceptions.)
If you are considering going through the process of settling your debts and reducing your credit, think carefully about whether the money you save on your debt is worth the cost and the risk.
How to negotiate with debt collectors for a lower settlement?
If you’re already 90 days or more behind on your debt repayment, you may be able to negotiate a debt settlement. Talk to your creditor about your financial situation, explain why you are behind on your bills, and offer to settle the debt for a sum of money that you know you can pay, such as 50% of the original balance.
Some creditors will want a lump sum to pay off the settled amount, while others will agree to a payment plan. If you’ve saved money, you can trade with more confidence.