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Debt Management or Debt Settlement: Which Is Better?

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In a Nutshell

Debt management is a way to reorganize your debt and make it easier to make your monthly payments. Debt settlement is a way to negotiate an agreement with a particular lender to pay less than what you owe but have the account be considered paid in full. Deciding which is better for you will depend on what kinds of debt you have and whether or not you're able to make a large payment (debt settlement) or just need more manageable monthly payments (debt management).

Written by Curtis Lee, JD
Updated July 26, 2023

For every way there is to get into debt, there’s someone or some company claiming they have a way to help you get out of it. At best, many of these methods aren’t very helpful. At worst, some are outright scams. But there are also some legitimate and useful tools to help you get out of debt. 

One such tool is debt settlement. This works by reducing the amount you have to pay to get out of a debt. Another is debt management. It works by restructuring the process you use to pay off your debts. These two approaches may sound similar, but they work very differently. So deciding which approach is best will depend on the unique facts of your financial situation.

Seeking Debt Relief vs. Managing Debt Successfully 

To most people, “debt relief” refers to any method, tool, or process that helps a borrower deal with debt. But in the personal finance world, debt relief has a more limited definition. Specifically, debt relief involves the partial or complete cancellation or forgiveness of debt. One of the most common types of debt relief is debt settlement.

In contrast, debt management involves the reorganization of debt. The goal of debt management is to make it easier and more straightforward for you to pay off your debt. For example, you can rearrange multiple debts into a single debt. With a single debt, you’re only making one payment every billing cycle.

Two common approaches to debt management taking out a debt consolidation loan or entering into a debt management plan (DMP). With both approaches, the total amount of debt stays the same, but you only have to make one monthly payment. It’s a lot easier to pay one bill each month, and this can help you avoid late fees or missed payments. Depending on your approach, debt management can also help you save money if you manage to get a lower interest rate during the reorganization. 

Some debt-reduction strategies combine debt settlement and debt management. A great example of this is Chapter 13 bankruptcy. Borrowers who file Chapter 13 can reorganize their debts and pay them down in more manageable chunks for three to five years. This is the debt management component. After this payment plan ends, any remaining eligible debts are discharged, which means they’re canceled or forgiven. This is Chapter 13 bankruptcy’s debt settlement component.

Before you commit to any debt solution, you should do research. This includes speaking with a debt professional. You can do this by scheduling a free consultation with an accredited, nonprofit credit counselor. During this credit counseling consultation, the licensed credit counselor will review your financial situation including your debts and income sources. From there, the credit counselor will advise you on a personalized strategy for paying off your debt. This strategy could include a DMP, debt settlement, or another approach.

What Is a Debt Management Plan?

Also called a debt management program, or DMP, debt management plans are a widely used debt management tool. DMPs are popular with accredited nonprofit credit counseling organizations, which are the same organizations that offer free credit counseling. 

In a DMP, the nonprofit credit counseling agency contacts two or more of your creditors on your behalf. They then negotiate with your lenders to get better terms for your debts, such as lower interest rates or fees for each account. If the agency is successful, this can help lower your monthly payment. Creditors are under no obligation to accept any DMP, although many of them agree to participate because it increases their chances of getting repaid.

If you’re participating in a DMP, you’ll make one monthly payment to the agency administering your plan. The administrator then divides that payment into individual payments for each of your creditors that are participating in the DMP. This setup often lasts for three to five years.

As a general rule of thumb, only revolving debts are included in a DMP. Credit cards are the most common type of revolving debt. Revolving debt allows individuals to borrow money without having to pay it all back by a deadline. Instead, the borrower can make minimum payments at certain intervals, such as each month. Most revolving debt accounts also allow borrowers to take out more money, even if there’s an outstanding balance. 

DMPs don’t often include other types of debts, such as secured loans or installment debts. Auto loans and mortgages are common types of installment loans. Borrowers who take out installment loans receive all of the money from the loan in one lump sum. Then the borrower pays the debt back in installment payments. 

Benefits of a DMP

A DMP can be a great way to reduce your debt. It has many advantages, including:

  • You’ll save money in the long run on lower interest rates and fees.

  • You’ll experience fewer or no collection calls from debt collection companies after a DMP.

  • Your monthly payments will be easier to make and more affordable, which also reduces the chances of having a late or missed payment and getting charged with a late payment fee.

  • You can improve your credit score by creating a positive credit history as long as you keep up with your monthly payments.

Drawbacks of a DMP

But like many other debt solutions, there are also several drawbacks to consider, such as:

  • You’ll often have to close any credit accounts you put into the DMP. And most DMPs will prevent you from opening any new credit accounts for the duration of the plan. If you violate this rule, you can lose the DMP and any associated negotiated terms like a lower interest rate.

  • You’ll need a consistent cash flow that allows you to make the large monthly payment to your DMP’s administrator. If you can’t make the full payment, or you make a late payment, you could get removed from the DMP.

  • You only have three to five years to pay off the revolving debt placed into the DMP. This could result in monthly payments that you can’t afford, which means a DMP wouldn’t work for you.

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What Is Debt Settlement?

Debt settlement mostly works for unsecured debts. Most consumer debts, like credit card debt and medical bills, are unsecured debts. Secured debts, such as your car loan or home mortgage loan, aren’t typically eligible for debt settlement. You can approach debt settlement in two ways. First, you can negotiate an agreement with your creditors on your own. Second, you can hire a for-profit debt settlement company to negotiate with your creditors on your behalf. 

If you take the first approach and do the debt settlement on your own, you won’t have to pay a fee to a debt settlement company. But the disadvantage is that you’ll miss out on the debt settlement company’s expertise and experience in negotiating with creditors. 

If you hire a company to settle your debts for you, they’ll try to convince your lenders to accept less than what you owe, while still considering the account as paid in full. During these negotiations, you’ll usually stop making payments to your creditors or debt collectors. Instead, you’ll put this money into an account overseen by your debt settlement company. Once you’ve saved enough, the company will negotiate for a debt settlement then make a lump-sum payment to one or more of your creditors. 

Debt settlement companies often ask their clients to stop making their payments so their accounts become delinquent. When an account is significantly past due, the debt settlement company may find it easier to persuade the creditor to negotiate. Understand that creditors don’t have to accept any debt settlement offer. But they may do so if they believe there’s a reasonable chance that you can’t pay back your entire debt.

You’ll only pay a fee to the debt settlement company if it successfully settles your debt. The fee can be up to 25% of the total debt they were negotiating with a creditor.

Benefits of Debt Settlement

Debt settlement comes with two major benefits. First, you could pay less money than what you owe. Second, settling an account will stop debt collectors and creditors from calling you or sending you bills in the mail. This can be a significant psychological boost. Despite these advantages, debt settlement has many disadvantages.

Drawbacks of Debt Settlement

The debt settlement process has several drawbacks. For one, it can take many months. During the negotiations, you won’t make any payments on your debts. That means your debt will increase as interest and late fees accrue. This not only increases what you owe, but it’ll do serious damage to your credit score. Also, collection attempts will usually continue during debt settlement negotiations. This includes receiving calls, letters, and even getting sued in a debt collection lawsuit.

You’ll also need to have a sizable amount of money on hand to settle a debt. Creditors will rarely settle debts with a repayment plan. And if they do, they’ll expect just a few large payments over a short period of time. Instead, most debt settlements occur with a lump-sum payment. Most borrowers in search of debt relief don’t have a lot of cash sitting around. So it could take years to build up the funds to make a reasonable debt settlement offer.

Another disadvantage is that it might be hard to find a reputable, trustworthy, and reasonably priced debt settlement company to hire. There are many disreputable companies out there. Some are scam artists who’ll just take your money and further ruin your credit history. And even if you find a good debt settlement company, they may still charge significant fees. While you may still save money on your debts, it may be a lot less than if you settled the debt yourself.

It’s also important to know that the IRS considers some canceled debt taxable income. A higher tax bill could cut into the amount of money you saved. This is a lesser-known drawback to debt settlement. Finally, creditors have some discretion in how they report settled debts to the three major credit bureaus. Some creditors will agree to mark a settled debt as “paid in full” on your credit report. But some may mark the debt as “partially paid” or something similar. This second scenario could cause your credit score to drop.

Which Approach Is Right for You? 

A debt management program or plan could be a good option for you if:

  • Most of your debts are revolving, unsecured debts, like credit cards.

  • A debt consolidation loan isn’t realistic, either because you can’t qualify for one or the terms don’t make financial sense for you.

  • You could benefit from the DMP requirements that stop you from creating more debt. This makes it harder to run up more credit card debt or open a new credit account.

Debt settlement might be a better option if:

  • You already have debts that are several months past due and damaged credit.

  • You can obtain a large lump sum of money to make a debt settlement offer. Even if you don’t have cash, you may still be able to do this if you can sell a sizable asset or know you anticipate having a lot of money coming in, such as with a tax refund or inheritance. 

If you decide to work with a credit counseling service or debt settlement company, do your research on them. For instance, make sure that any credit counseling agency employs certified credit counselors and that the agency itself has national accreditation. One of the most well-known accrediting organizations is the National Foundation for Credit Counseling (NFCC). As for debt settlement companies, check to see if they have any complaints against them that are registered with the Better Business Bureau (BBB), Federal Trade Commission (FTC), or Consumer Financial Protection Bureau (CFPB). You can also do an online search for some debt settlement companies and see what kind of reviews and comments you can find online.

Let’s Summarize...

If you’re looking to get out of debt, you may benefit from debt settlement or debt management. Figuring out which approach is best will depend on your individual situation. There are numerous resources online to help you make that decision, but it’s still a good idea to schedule a free credit counseling session. Talking to a credit counselor will give you a better understanding of your financial position and what to do next.

Written By:

Curtis Lee, JD


Curtis Lee is a writer and co-owner at Marvel Hill Freelance. Curtis earned his Bachelor of Science in Business from Wake Forest University and his Juris Doctor (JD) from Villanova University School of Law. After graduating law school, Curtis had the honor of clerking for a stat... read more about Curtis Lee, JD

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