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Debt Management Plan or Debt Settlement: Which Is Better?

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In a Nutshell

If you have mostly credit card debt (or other unsecured debts), you can afford to make regular payments, and you're looking to rebuild your credit, a debt management plan might be the way to go. If you have unsecured debts that are already in collections, need a quicker solution, and are able to make a lump-sum payment, debt settlement could be a good option. Keep in mind: Every person’s situation is different, and it’s important to understand the positive and negative consequences of the debt relief option you ultimately choose.

Written by Curtis Lee, JD
Updated May 21, 2024

What’s the Difference Between Debt Settlement and a Debt Management Plan?

Before you can figure out which debt relief option is best for you, it’s important to know the basics about each one.

With debt settlement, you negotiate with your creditors or debt collectors to pay off your debts for less than what you owe. Why would they agree to this? For one, it costs them money to try to collect the debt from you. And two, they might prefer to get paid something than not be paid at all.

Debt settlement can be tempting because it usually means paying less overall, but it can also have some downsides. It can hurt your credit score because you're not paying back the full amount you borrowed. Plus, there's no guarantee your creditors will agree to settle, so it can be a bit of a gamble.

On the other hand, a debt management plan (DMP) is a more structured debt relief option. You work with a credit counseling agency to come up with a plan to pay off your debts in full, usually over a period of 3–5 years. The agency negotiates with your creditors to lower interest rates and waive fees, which can make it easier to manage your payments. Plus, you only have to make one monthly payment, which can help you avoid late fees or missed payments. 

The upsides here are that it's more predictable, you get support from a credit counselor, and it can help you rebuild your credit as you make consistent payments. The downsides are that it takes a while, you need to stay consistent with your repayment plan, and it might hurt your credit score in the short term as your credit card accounts get closed.

What Are the Other Debt Relief Options?

Debt settlement and DMPs aren’t the only ways to deal with overwhelming debt. Two other popular debt relief options are debt consolidation and bankruptcy.

What Is Debt Consolidation?

A DMP is a special type of debt consolidation. Typically when people consolidate their debt, they do so with a personal loan or by getting a balance transfer credit card that has a 12–18-month promotional interest rate of 0%. People can use the funds from a personal loan to pay off high-interest credit cards or other debts. And they only have to focus on repaying the personal loan each month. 

The upside of this is that most personal loans have lower interest rates than credit cards, so you’ll pay less in the long run. Also, you won’t be required to close your credit card accounts like you will under a DMP. The downside is that you need to have good credit to get approved for a loan with good terms. Also, you have to be committed to not using your credit cards in the same way, or you’ll just add to your debt load in the long run.

What Is a Balance Transfer Credit Card?

With a balance transfer credit card, you can transfer other high-interest credit card balances onto the new card and focus on repaying the balance of that card before the promotional interest rate period ends. Not having interest accumulate for a period of time can help you catch up with the debt repayment. But the downside here is that the clock is ticking as soon as you open the card, so you’ll need a good plan to repay the debt in the 12–18 months allotted or you’re likely to end up right back where you started.

How Do You Know Which Debt Repayment Option Is Best for You?

You’re off to a good start by reading this article and educating yourself on different options! But the truth is that everyone’s situation is different, and it can be tricky to figure out the best course of action even with good sources of information. 

The good news is that you don’t have to figure it out on your own. You can get a free consultation with a licensed credit counselor to talk through which option is best for you. Consumer credit counseling agencies are non-profit organizations committed to helping everyday people become debt-free.

During your free session, the credit counselor will review your financial situation, including your debts and income. From there, they’ll help develop a personalized strategy for paying off your debt. This strategy could include a DMP, debt settlement, bankruptcy, or another approach.

Debt Management Plans vs. Debt Settlement: Which Debts Can You Include?

Not all debt is the same. Some types of debts can be addressed by both a DMP and debt settlement, while others can’t be addressed with either. 

Debts that can typically be included in both a debt management plan (DMP) and debt settlement:

  • Credit card debt

  • Medical bills

  • Personal loans

  • Collection accounts

Debts that can’t be included in either a DMP or debt settlement:

  • Secured debts like mortgages or car loans

  • Federal student loans

  • Court-ordered payments like child support or alimony

  • Debts owed to family or friends

Private student loans and past-due income taxes are unique types of debt. You may be able to settle tax debt, but you need to contact the IRS to do so. If you’re struggling to repay private student loans, your lender is unlikely to settle and may not work with the administrator of your DMP. If that’s the case, refinancing your debt may be worth looking into. 

If you work with a credit counselor, be sure to tell them about all your debt so they can help you figure out the best option(s) for your situation. 

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What Are the Pros and Cons of a Debt Management Plan?

This is a great question to ask when you’re comparing different debt relief options. Every option will have benefits as well as drawbacks. When you’re reading about each, pay attention to what’s important to you.

What Are the 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 through reduced interest rates and fees.

  • You shouldn’t have to deal with collection calls from debt collection companies or creditors anymore.

  • Your monthly payments will be easier to make and more affordable, which increases your chances of making on-time payments and reduces the risk of paying late and getting charged 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.

What Are the Drawbacks of a DMP?

Like 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. 

    • Most DMPs will prevent you from opening any new credit accounts during your 3–5-year 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 monthly payments on time. If you can’t make the full payment or you make a late payment, you could get removed from the DMP.

  • You only have 3–5 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.

What Are the Pros and Cons of Debt Settlement?

Debt settlement can be a great option for people who have debts in collections and who are confident in negotiating with creditors or debt collectors. (It might not be as hard as you think!) But debt settlement can harm your credit score and could increase your annual tax bill. Let’s dig deeper into the pros and cons.

What Are the Benefits of Debt Settlement?

Debt settlement comes with two major benefits:

  • You save money by paying less than what you owe — sometimes as little as half of the total debt you owe.

  • You won’t have an unpaid debt hanging over your head anymore. Once the account is settled, it’s closed for good.

  • 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.

What Are the Drawbacks of Debt Settlement?

  • If you settle the debt on your own, you’ll need to be courageous and persistent, which can be hard if you’re experiencing a lot of stress or don’t have the time or energy to deal with it.

  • If you want to hire a debt settlement company, you might have trouble finding a reputable and reasonably priced agency to work with. If you hire a bad debt settlement company, you risk losing your money and increasing the negative marks on your credit history. Here’s how to avoid debt relief scams.

  • You might have to pay taxes on the forgiven debt. If your settlement saves you more than $600, that’ll be treated as taxable income by the IRS and you’ll have to pay taxes on your annual return.

  • It can really hurt your credit. If you’re negotiating the settlement yourself, you can also negotiate how the creditor reports the settled debt account to the credit bureaus. If they insist on reporting it as “partially paid” or “settled,” you can expect your credit score to take a hit. Also, if you aren’t making payments during the settlement process, your score will suffer then, too.

Debt Settlement vs. DMP: Final Thoughts on 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 unsecured debts like credit cards or medical bills.

  • 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 since DMPs make 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 anticipate having a lot of money coming in, such as with a tax refund or inheritance. 

Again, it’s a great idea to enlist the help of a credit counseling service to figure out which option is right for you. Make sure that the credit counseling agency you choose 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). 

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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