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Debt Management vs. Debt Settlement

Chloe Meltzer | December 13, 2023

Legal Expert
Chloe Meltzer, MA

Chloe Meltzer is an experienced content writer specializing in legal content creation. She holds a degree in English Literature from Arizona State University, complemented by a Master’s in Marketing from California Polytechnic State University-San Luis Obispo.

Edited by Hannah Locklear

Hannah Locklear
Editor at SoloSuit
Hannah Locklear, BA

Hannah Locklear is SoloSuit’s Marketing and Impact Manager. With an educational background in Linguistics, Spanish, and International Development from Brigham Young University, Hannah has also worked as a legal support specialist for several years.

Summary: Worried you'll never be able to pay off your debts? Find out if debt management or debt settlement is right for you.

When it comes to debt, there is never a situation that you hope to find yourself in. Whether that is student loan debt, credit card debt, or tax debt, paying off debt can be difficult and stressful. As debt piles up you might look for alternative options to get out of debt. Debt management and debt settlement are two different forms of debt relief. Although they are similar, they are not the same. It is essential to learn the difference between the two and decide what will work best for you.

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Common Strategies to Get Out of Debt

There are a few main forms of debt strategies. Although this includes debt settlement and management, there are also other options as well.

  1. Debt Snowball. Focus on paying your smallest debt first. Continue to pay your minimum payment on other debts to ensure you do not go into default. After you pay that off, take this payment and begin to roll the amount into payments on the next debt. This will teach you how to make a consistent payment and allow you to learn to pay a larger payment as time goes on.

  2. Debt Avalanche. Pay off your debt that has the highest interest rate first. Continue to pay the minimum payments on all of your other debts, but be sure to take care of the one with the highest interest first. This will save you money over time in interest.

  3. Debt Consolidation. When you have multiple debts, debt consolidation is a good option. Essentially it allows you to combine multiple old debts into one single payment. Typically the hope is that you will have one loan at a lower interest rate. This will make your payments more manageable, and it should allow you to pay off your debt faster. There are a variety of debt consolidation methods, including balance transfer cards and personal loans.

  4. Debt Management Planning. If you are facing a huge amount of debt and haven't been able to make much of a dent, then a nonprofit credit counseling agency may be able to help. This involves setting up a debt management plan which should cut your interest and put you on a plan.

  5. Debt Settlement Companies. Hiring a debt settlement company is expensive, but is a better option than bankruptcy. Typically they will help you lower your overall debt payment so you can pay it off as soon as possible.

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Debt Management

Debt management programs are administered by nonprofit credit counseling companies. When comparing debt management programs to debt settlement companies, imagine debt settlement companies as a corporation, and debt management programs as a non-profit organization.

Work With the Company

When it comes to a debt management program, you will work with a credit counseling company. They will work with you to negotiate your debt to reduce interest rates and fees. Sometimes you may also be able to negotiate lower payments.

Pay Your Debt off Slower

Instead of reducing the overall amount, you will simply be able to pay it off slowly. Essentially they help you pay off your debt in a manageable way. This ensures that your credit score is not impacted, and you will not suffer financially in other ways.

Improve Financial Planning Skills

Credit counselors look to teach you how to improve your financial planning skills. They can also teach you how to budget, and stay on track in the future.

Who Should Choose Debt Management?

You may want to choose a debt management program over a debt settlement company if:

  • You suffer from primarily credit card debt
  • You have more debt than you can handle through debt cons
  • Your credit score does not qualify you for a balance transfer credit card
  • Your credit score does not qualify you for a personal loan
  • You want a plan to help you avoid adding more to your debt

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Debt Settlement

When first examining your options, debt settlement may seem like the better option. Debt settlement companies typically tell you to stop paying off creditors and debt collectors while you negotiate a lower payment. The next step involves the debt settlement company paying the creditors on your behalf.

The Downside of Debt Settlement

Debt settlement typically only has you paying about 50% to 80% of your total debt balance. Although you might feel like this will save you time and money there is one major issue with this. The lower payment that was negotiated by the debt settlement company will be lower than your full outstanding balance. If you do not pay your entire debt, then your credit score will drop.

It is also good to note that debt settlement companies don't work for free. Typically you will be charged as much as 15% to 25% of the amount settled.

You Might Be Sent to Collections

Because debt settlement companies do not pay creditors while negotiating, you may also receive collection calls. This means that you will be late on your payments, which gets reported to the three major credit bureaus (Experian, TransUnion, and Equifax). This form of negative credit information stays on your report for seven years. Whether your settlement is successful or fails, your credit will be damaged.

Tax Implications for Debt Settlement

When it comes to a debt settlement, you need to be careful. If you have settled for less than the full balance, you can also suffer from tax implications. This is because the debt that is forgiven will be reported to the IRS as income. You will need to pay income taxes on the money that you were forgiven for.

Who Should Choose Debt Settlement?

If you have an account that is extremely delinquent and in collections, you may want to choose a debt settlement company. This is because your credit score is most likely already very damaged, and there is no reason why this can hurt your score further. You may also choose this plan if you believe the creditor will accept a partial payment. Although you may not be able to fix your score, you may be able to at least pay less of the debt overall.

What is SoloSuit?

SoloSuit makes it easy to respond to a debt collection lawsuit.

How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.

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"First time getting sued by a debt collector and I was searching all over YouTube and ran across SoloSuit, so I decided to buy their services with their attorney reviewed documentation which cost extra but it was well worth it! SoloSuit sent the documentation to the parties and to the court which saved me time from having to go to court and in a few weeks the case got dismissed!" – James

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