While both debt management and debt settlement programs are considered debt-relief programs – they are really very different.
And you should be aware of those differences, especially if you plan to hire any type of service to help you get back in control of your personal finances.
When you hire a debt management company to help you with your debt, you’re hiring a company that has pre-existing payment arrangements with many creditors.
These payment arrangements are dictated by the creditors and are usually the same from one debt management company to the next.
The payment arrangements typically involve lowering your interest rates on your accounts which in turn, lowers your payment.
If they’re able to do this for several accounts, those savings could add up and you could wind up saving lots of money each month with regard to your total payments for all your accounts.
Once you’re accepted into their program – you’ll remit payment directly to the debt management program, and they’ll redistribute those payments to your creditors within a specified time frame.
While on a debt management program – you’ll wind up paying back 100% of what you owe plus some interest.
When you hire a debt settlement company to negotiate your debt, you’re hiring a company that is going to “attempt” to negotiate a lower balance on your accounts, not lower interest rates.
Also, debt settlement companies do not have pre-existing payment arrangements with creditors as debt management companies have.
They may have a track record of settlement percentages with certain creditors, however, those percentages could change at any time.
And you should be cautious of any debt company that represents themselves as having agreements with creditors you’re hoping to negotiate with.
Instead of remitting a monthly payment to the debt settlement company, you will typically put that payment amount in a separate account where those funds accumulate until you have enough to make a settlement offer.
This means that the creditors with whom you’re hoping to achieve a settlement are not getting paid until a settlement is made.
If you have 5 or 6 accounts earmarked for settlement, you’ll most likely be able to only settled one at a time. The remaining accounts will continue to fall behind and may accrue late fees and interest resulting in an increase of the balances owed.
And the possibility of those accounts going into collection is rather high.
While there are many differences between debt management and debt settlement programs, let’s recap the three we just covered and see how they compare.
The first is where your monthly payment goes.
On a debt management program, there is that pre-existing payment arrangement. When you remit payment to the program, those funds are redistributed appropriately to your creditors.
In this environment, the possibility of your accounts going into collection are minimal.
With a debt settlement program, there is no pre-existing payment arrangement and your monthly payment is funneled into an account where those funds accumulate until such a time when there’s enough to make a settlement offer.
Because of this, the likelihood of your accounts going into collection is higher than that of a debt management program.
The second is how much you will wind up paying your creditors While on a debt management program you’ll wind up paying 100% of what you owe, plus some interest.
However, the interest will most likely be lower than what you were paying before enrolling in the program.
On a debt settlement program, you should wind up paying lower balances because the balances are being negotiated instead of the interest rate.
The third difference is that a debt management program will typically have a higher monthly payment than a debt settlement program.
This is because debt management focuses on negotiating the interest rates, where debt settlement focuses on negotiating the balances you owe.
Hopefully, you now are feeling better informed about making any decisions you’re considering with getting help with your debt problem!