Debt Management Plan vs Debt Resolution Plan vs For-profit Debt Settlement
If you’re stressed about debt and struggling to make your monthly payments, you’re probably looking for whichever debt relief option solves your problems as quickly and painlessly as possible.
Debt management plans (DMP) and debt resolution plans (DRP) are both great debt relief options for consumers who are struggling to manage their monthly payments. But while they both consolidate your debts without a loan, they function very differently and are best suited for consumers in different situations.
And while debt resolution is debt settlement, there are some crucial differences between non-profit debt resolution plans (DRP), also known as debt resolution programs, offered by organizations like MMI, and traditional debt settlement agreements facilitated by for-profit companies. Both can get you out of debt by paying less than what you owe, but the flexibility and costs can be significantly different.
Here's what you need to know about all three options and how they compare.
How a debt management plan works
A debt management plan is offered by nonprofit credit counseling agencies like MMI. They’re designed to help you repay your debt in full but can save you a lot of money thanks to deeply reduced interest rates.
- Begin by working with a debt and budget counselor to review your finances and create a plan that best suits your situation
- Start making monthly payments to the plan administrator
- The plan administrator contacts your creditors after the first payment and presents them with payment proposals; these payment proposals typically include significant reductions in your interest rates
- Once the proposals are accepted, the plan administrator begins making monthly payments to each creditor account on your behalf
- Because of the newly proposed terms, debts are repaid faster (on average 7x faster than paying on your own), saving you money in the process (MMI DMP clients save nearly $50,000 on average)
- Finally, because debts are repaid in full, your credit score will likely improve by the end of the DMP (MMI DMP clients see an average credit score increase of 82 points)
Who’s it best for?
If your debts are current, you're concerned about your credit score, but you aren’t making any progress on your debts on your own, a debt management plan is an ideal way to supercharge your debt repayment and save you a lot of money in the process. Because the main benefit of a DMP is the reduced interest rate, however, if the majority of your debts are charged off and in collections, you may benefit more from a debt resolution plan.
How a debt resolution plan works
A debt resolution plan, also known as a debt resolution program, is essentially a nonprofit spin on debt settlement:
- Begin by working with a debt counselor to create a plan and make sure it’s right for you
- Start making monthly payments to the plan administrator
- While funds are being collected, your debt counselor will begin negotiating with your creditors for a partial repayment (as low as 50% of the original balance)
- Once these settlement agreements are reached, the plan administrator will begin using the accumulated funds to repay your creditors
- After every account is settled, your plan is closed and you are debt-free
Who’s it best for?
Debt resolution is best for consumers who are already delinquent on their debt payments, or are about to become delinquent, and can’t repay their debts in full under their current terms. The best candidate for a debt resolution plan is usually someone whose current debt payments and expenses are significantly bigger than their income.
Non-profit debt resolution plans and for-profit debt settlement are two roads that lead to similar outcomes. In both cases, you’ll save money by repaying less than what you owe. With a DRP, however, the fee structure is more user-friendly and there’s less risk in the event that you don’t complete your plan. Plus, MMI counselors will help you explore all other options including debt management plans first, and MMI offers access to optional (though highly recommended) legal assistance in the event a creditor takes legal action against you during your DRP.
How a for-profit debt settlement works
The basics of for-profit settlement are very similar to non-profit debt resolution:
- Work with a settlement company to create a repayment plan
- Make monthly payments to the settlement company
- As funds accumulate, the settlement company begins negotiating with your creditors
- Often the settlement company will collect their entire fee after the first creditor payment
- Once all your accounts are settled, your plan is complete and you’re debt-free
Who’s it best for?
People often turn to for-profit debt settlement when they’re overwhelmed by debt and want to avoid bankruptcy. These companies negotiate with creditors to reduce what’s owed, offering a structured—though potentially risky—path to relief.
Traditional, for-profit debt settlement plans typically front-load their fees to ensure they get their entire fee, even if you don’t complete your plan. If you’re able to handle the fees, this could be an option for you. However, if you’re not already behind, you’ll need to intentionally miss payments as part of the settlement. This strategy is used to demonstrate financial hardship and incentivize creditors to negotiate, but comes with serious credit consequences. If your debt has reached a level where your credit score impact is less important, this could be the right choice for you.
Comparison of Debt Management, Debt Resolution, & For-profit Settlement
| Debt Management Plan | Debt Resolution Plan | For-profit Debt Settlement | |
|---|---|---|---|
| Debt types covered | Credit card debt, personal loans, medical debt, collection debt | Credit card debt, personal loans, medical debt, collection debt | Credit card debt, personal loans, medical debt, collection debt |
| Length of time | 24-48 months | 36-60 months | 36-60 months |
| Interest rate | Average interest rate is less than 7% | No interest charges | No interest charges |
| Fees | One-time set-up fee (average $38). Ongoing monthly fee (average $27). You may be charged a $15 fee if payments are returned for insufficient funds. | In most states, MMI’s fee is 15% of the original balance collected incrementally as each account is settled. You may be charged a $15 fee if payments are returned for insufficient funds. | Usually 25%-30% of the original balance, though fee structures vary. |
| Consequences for missing a payment | Missing payments may cause individual creditors to revoke your plan benefits, including reduced interest rates. Plan may be cancelled after missing multiple payments. | No consequence for missing a single payment; plan may be cancelled after missing multiple payments. | Typically no consequence for missing a single payment; plan may be cancelled after missing multiple payments. |
| Consequences for closing account before completion | The DMP may be canceled at any time with no penalty; clients would need to resume managing creditor payments directly. | The DRP may be canceled at any time with no penalty; any accumulated funds that have not been paid to creditors or collected as fees for service would be refunded; collection efforts will restart. | Because most for-profit settlement companies collect their entire fee at the beginning of the process, you won’t be able to reclaim any of those funds despite not completing your program; collection efforts will restart. |
| Credit requirements | No credit requirement | No credit requirement | No credit requirement |
| Credit score impact | Credit score may dip at the beginning of the plan as included accounts are closed, however score typically improves greatly over duration of plan (average 82 point increase). | Missing payments and settling for less than what’s owed are bad for your credit, though you should be able to recover quickly once the debt is paid off. | Missing payments and settling for less than what’s owed are bad for your credit, though you may be able to recover quickly once the debt is paid off. |
| Potential savings | Compared to making minimum payments under original terms, MMI DMP clients saved an average of $48,199. | You may be able to settle for as little as 50% of your original balance, plus fees. | You may be able to settle for as little as 50% of your original balance, plus fees. |
| Potential legal action | The DMP is best suited for accounts that are not in collections making legal action highly unlikely. | Creditors may still sue for unpaid debts while on a DRP, however MMI offers an optional legal protection plan to handle any potential legal action you may face. | Creditors may still sue for unpaid debts while seeking a settlement agreement. |
Conclusion
If you’re struggling badly with credit card debt, all options should be on the table. The key really comes down to how serious your situation has become, what kind of payment you can afford, and what option has the more affordable fees.
If your accounts are already in collections or are headed that way because you just can’t handle the payments as they currently are, then debt resolution or debt settlement may be your best choice.
On the other hand, if your accounts are current or just a month or two past due, and you what you really need is some help getting more manageable payments, a debt management plan should be your first stop. Both debt relief options can make a huge difference, though, so start with a free online financial analysis and see which is best for you.
