When trying to find viable solutions for resolving unsecured debt, consumers will inevitably come across the options of debt settlement and debt management. While these terms sound similar, in reality, they represent two vastly different methods of debt relief. In an effort to explain, let’s examine the main differences and where each is best applied.
Debt Management
In the world of debt relief, this term generally means working with a debt management service to negotiate and manage debt payment amounts, dates, and interest rates with creditors. Debtors then pay the debt management service one consolidated payment each month to satisfy all of their creditors.
Debt management services are usually non-profit organizations that charge a small fee for their services.
Using this method gives debtors a way to:
- maintain and improve their credit score
- simplify their payment management
- reduce the amount owed in small measure
On the other hand, this method still involves a hefty payment each month, and if this amount isn’t paid, debtors will be removed from the debt management program and have to start over. This makes this method an unviable option for consumers dealing with more debt than they can realistically manage.
Debt Settlement
This option involves working with a debt settlement service to drastically reduce the debt owed by negotiating a settlement offer with creditors. This can be a good option for dealing with high amounts of credit card and other unsecured debts, especially, when they’re already in collections.
This is a viable option for consumers who don’t want to file bankruptcy, yet can’t afford to pay the monthly payments on their debts or a large consolidated debt management payment. Debt settlement services will advocate on behalf of debtors, in order to reduce the amount owed upwards of half or more.
While this method might not be ideal for every situation, it does gives people a good option when their debts are already delinquent or in collections, as their credit scores have already been damaged; yet, it can also be a viable option in cases where debts are not delinquent and debtors have decent credit scores, if monthly payments are too large to manage.
With debt settlement, instead of filing for bankruptcy or being buried in unmanageable monthly payments, debtors stop making payments and save what money they can while trying to reach a settlement deal with creditors through a debt settlement service. This is the ideal debt relief option when a debtor’s credit score is already damaged and the late fees, interest, and penalty fees have already been applied.
Choosing the Right Debt Relief Method
Ultimately, the right debt relief method will depend on the situation and preferences of debtors. What matters most is that they’re taking positive steps towards gaining freedom from their debts. With the right strategy and method, debts can be resolved with optimal results, including being able to viably manage monthly payments and maintain a good credit score.
Many times, finding the right method is simply a matter of gaining the right perspective. Here are two examples to help debtors find the right perspective with debt relief options.
Example #1: Decent credit, heavy debt load, can’t make monthly payments.
Some people may be hypersensitive about their credit scores being damaged, yet can’t afford their monthly credit card payments. This makes planning for debt settlement or filing bankruptcy difficult, although these options may fast-track their ability to resolve their total debt.
Instead, they put themselves under severe stress by trying to pay off their heavy debt load for years, only to, perhaps, end up with late payments, penalty fees/interest, collections, and damaged credit scores after all.
On the other hand, they could’ve simply stopped making the payments they couldn’t afford anyway (instead, saving as much as they could), and eventually settle for a much lower amount that doesn’t include all the ridiculous penalty fees.
Both ways will negatively affect their credit scores, yet only debt settlement will resolve their total debt. Even if they were able to manage the min. payments every month and maintain decent credit scores, they’d be paying mostly interest, resulting in their paying double, triple, or quadruple the original amount of debt in the end.
Basically, their reluctance to damage their credit scores with debt settlement or bankruptcy will cost them thousands of dollars in interest and years of stress. On the other hand, with the debt settlement option, they could’ve eliminated the interest, penalty fees, and some of the principal debt within a couple of years.
While credit scores would be damaged during this time, total debts would be paid off and debtors would be on their way to rebuilding their credit scores within a year.
Example #2: Bad credit, heavy debt load, can’t make monthly payments.
This type of scenario makes it easier to choose debt settlement or bankruptcy, as debtors aren’t worried about damaging their credit scores. Basically, debtors find themselves in the worst case scenario where their debts have already gone to collections and their credit scores have already been damaged.
Unless someone has dealt with this situation before, their advice is only theoretical; those who have dealt with collections, excessive interest and penalty fees, huge monthly payments, and a badly damaged credit score, understand that debt settlement or bankruptcy can be good options.
Basically, if debtors can’t make their monthly min. payments or a large consolidated payment, these are the only responsible options available. And even if they could make the payments, these options will resolve the total debts owed much sooner and alleviate debtors of the constant stress from trying to make unmanageable monthly payments.
When debts are settled with a creditor, they’ll show on a credit report as “Settled”, which isn’t as good as “Paid Settled”, yet is better than “Unpaid.” Showing a “Settled” status is also better than bankruptcy, which stays on a credit report for 7 years. This is why debt settlement methods should be used before bankruptcy if possible.
Working With a Debt Settlement Service
If debtors find themselves in a situation where debt settlement is the best method, they’ll have the options of managing and negotiating the settlements themselves or outsourcing this challenging task to a debt settlement service. In most situations, outsourcing is the better option, as debt settlement services have the expertise and experience to negotiate and manage settlements more effectively; this helps fast-track the process and bring optimal results.
Working with a quality debt settlement service with a good reputation will help debtors resolve their heavy debt loads without filing for bankruptcy or paying large unmanageable monthly payments. Their understanding of the financial and debt relief industries and experience negotiating with creditors will help debtors navigate the process and achieve optimal settlement amounts. If interested in learning more please contact Debt Blue today.