Debt Management Plan vs Debt Settlement - How Do You Decide Which is Right for You?

Debt Management Plans (DMP) and debt settlement are both ways to pay off debt, but they work differently. They also have different consequences, so it’s important to understand how they both work so that you can make the right decision for you.

Debt Management Plans

Payments are structured

In most cases, your interest rates will be lowered and certain fees (such as late or over limit fees) may be waived. You’ll make a monthly payment every single month to cover all of your included debts.

Debts are paid in full

Over the course of your DMP, your included credit accounts will be paid in full - usually in around 36 to 48 months.  

You’ll save money

While you’ll pay off your debts in full, you’ll save money on reduced interest fees.

Your credit will likely improve

Assuming you make your make your required payment on time every month, it's very likely that your credit will have improved by the end of your program.

Read more: Credit Impact of a Debt Management Plan

Collection efforts should stop

If your accounts were delinquent prior to beginning a DMP, you may be receiving collection calls and letters. Once a creditor formally accepts the terms of a debt management plan, however, those calls and letters should stop. As an extra bonus, many creditors will actually re-age your account after a certain number of DMP payments - which essentially means they'll consider the account current even if you never made up those missed payments. 

It’s not a given

Creditors don’t have to agree to the terms of a DMP, but chances are very good that they will. Remember - a DMP means you'll be paying your debt in full, which is preferable for creditors than having you file for bankruptcy or choose debt settlement.

You won’t be able to keep charging

During a DMP, your included credit accounts will be closed, meaning you won't be able to use those accounts for new charges. It's also recommended that you don't apply for new credit cards during a DMP, as creditors may choose to rescind your DMP benefits (reduced interest, waived fees, etc.) if they see that you're continuing to create new debt.

You might not be able to afford it

Debt management plans that are facilitated by nonprofit credit counseling agencies like MMI are required to be part of a sustainable budget. In other words, a credit counselor cannot suggest a DMP if the payments aren't affordable for you. While counselors strive hard to create a budget that supports your debt-repayment goals, it may be that your income is not enough to sustain your living expenses and a debt management plan.

Debt Settlement

You’ll likely pay less than what you owe

Settling your debt means you'll reach an agreement with creditors where they accept less than the full amont owed as the payoff amount. Settlement is the only repayment method where you pay less than what is owed, so you'll save money in the sense that you won't have to repay your full debt amount. 

Your credit score will drop

Creditors generally will not negotiate a settlement on accounts that are current. This means most settlement programs will require you to intentionally miss payments in order to bring your accounts delinquent. These missed payments, plus the fact that accounts will be not be paid in full, will likely all have lasting negative effects on your credit score.

Read more: Credit Impact of Debt Settlement

Creditors may continue collection efforts

If you begin missing payments, you will very likely start getting phone calls and letters from various collection departments. The fact that you're attempting to settle your debt won't change this. They'll continue attempting to collect the debt until it's been paid or settled.

You may owe more in income taxes

Forgiven debt over a certain amount is usually viewed as taxable income by the IRS and will need to be accounted for on your income tax returns. Depending on the amount of forgiven debt, this could potentially cost you more in taxes.

It’s not a given

 Creditors are not required to settle with you and can refuse. This could potentially leave you in a worse situation than where you started.

You will need to work with each creditor

Unless you use the services of a professional debt settlement company, you'll need to deal with each creditor individually. 

Regardless of which one you choose, it would be in your best benefit to talk to a professional credit counselor to review your options. You may decide you don’t need their help, but most non-profit services offer a free consultation which can help you make the right decision for your situation.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.