Debt Management vs. Debt Settlement vs. Debt Consolidation

Debt relief has a vocabulary problem. Debt management, debt settlement and debt consolidation sound like three versions of the same idea. They aren’t, and choosing among them can affect your cost, credit and risk.

Here’s a quick explanation:

• Debt management plan: Repay eligible debts in full through one monthly payment with reduced interest rates.
• Debt settlement: Ask creditors to accept less than the full amount owed.
• Debt consolidation: Combine multiple balances into a new loan or balance transfer credit card.

Debt management can also be more flexible than it first sounds. If some cards are current while others are far behind or charged off, InCharge may be able to use different solutions for each account. Some may go on a traditional DMP, while qualifying accounts may be placed in its Less Than Full Balance (LTFB) program, also called a credit card debt forgiveness program. Both can be combined into one blended plan.

The best choice comes down to what your budget can handle, whether you can qualify for a lower-cost loan and how much risk you’re comfortable taking on. Here’s how each option works and what to watch for.

The Three Options at a Glance

Use this table as a filter, not a scorecard. A smaller payment can hide extra fees, a longer payoff or more risk.

Debt Management Plan

A debt management plan gives you an organized way to repay eligible debts without taking out another loan. You make one monthly payment to a nonprofit credit counseling agency, which pays the creditors in your plan.

On a traditional DMP, you still repay the full balance, but creditors may lower your interest rate or waive certain fees. These breaks aren’t automatic and can vary by creditor and account.

DMPs are generally meant for eligible unsecured debts, such as credit cards. Secured debts usually aren’t included. Your credit score alone doesn’t decide whether a plan could work. Your budget must support the payment, and your debts and creditors must be eligible.

A DMP doesn’t ask you to stop paying your bills. Still, credit cards in the plan generally close, and creditors may report account changes. The effect will depend on your full credit history and how each creditor reports.

Agencies may charge setup and monthly fees, and costs can vary by state. A plan also often takes several years. Before enrolling, ask which debts are included, what the fees will be and what happens if a creditor doesn’t participate.

How Does Debt Management Handle Charged-Off Accounts?

If some credit card accounts are already far behind or charged off, InCharge may be able to include them through LTFB. Participating creditors may accept less than the full amount owed, but the account has to qualify and the creditor or company that owns the debt has to participate.

You don’t necessarily have to use the same approach for every card. If some accounts are current or only slightly behind and others qualify for LTFB, a blended DMP can combine them in one program. You still make one monthly payment. Traditional DMP accounts are repaid in full, while eligible LTFB accounts are repaid for less. That can give you the best of both worlds: the chance to pay less interest on traditional DMP accounts and reduce the balance on qualifying LTFB accounts.

That means a debt management program may still be worth considering even if your accounts aren’t all in the same place. If you can make a steady payment, a counselor can look at each account and see whether a traditional DMP, LTFB or a blend of both could work.

Debt Settlement

Debt settlement changes the goal. Instead of repaying the full balance, you or a settlement company asks creditors to accept less than you owe.

LTFB also reduces what you repay on qualifying accounts, but it works differently. It is designed for accounts that are already far behind or charged off, and a blended DMP can keep your other accounts on traditional repayment terms. Commercial settlement is a separate process with a different set of risks.

That can sound like the obvious bargain, but there is a catch. In many commercial programs, you save for settlement offers while accounts go unpaid. Interest and late fees can grow, collection calls may continue, lawsuits are possible and missed payments can seriously hurt your credit.

The company can contact creditors, but it can’t make them agree. Some offers may be rejected, and debts may remain unsettled. No company can promise your savings or a finish date.

Federal rules generally prevent debt settlement companies from charging you before they settle a debt. In most cases, the company must reach an agreement you accept and you must make at least one payment first. That rule doesn’t eliminate the other costs and risks, and state requirements can vary.

Taxes can add another surprise. The IRS may treat forgiven debt as income, and the creditor may send Form 1099-C. Bankruptcy, insolvency and other exceptions or exclusions may apply. Review the IRS guidance on canceled debt or speak with a tax professional.

Settlement may be worth considering when full repayment isn’t realistic and you can save enough to make offers. Just know that acceptance, savings and timing aren’t guaranteed.

Debt Consolidation

With debt consolidation, you use a new loan or balance transfer to pay off several debts, then make one payment on the new account.

Don’t confuse one payment with less debt. Consolidation doesn’t reduce the balance by itself. It simply moves the debt, and whether that move saves money depends on the new terms.

Before accepting an offer, compare the annual percentage rate, fees, repayment term and total amount you’ll pay. A longer term can make the monthly bill look easier while costing more overall. If the loan is secured, you could also put your home, vehicle or another asset at risk if you can’t keep up.

Consolidation makes the most sense when the new terms lower your total cost and the payment fits your budget. Whether you can get a worthwhile deal will depend on your credit and the type of loan or balance transfer.

If you can afford full repayment but don’t want or can’t get a new loan, compare consolidation with a DMP. A DMP may offer a structured, no-loan alternative.

How to Choose

Start with your budget, not the advertised monthly payment. Ask whether you can realistically repay the full balance and how much room you have each month after covering your basic expenses.

• You can repay the full balance, but interest is keeping you stuck: Compare a DMP with consolidation and look at the total cost of both.
• Some accounts are current, but others are far behind or charged off: Ask whether a blended DMP could work. It may let you repay current accounts in full, with possible interest reductions, while paying less than the full balance on qualifying LTFB accounts, all through one monthly payment.
• You qualify for a loan or balance transfer that will actually save you money: Consolidation may be worth considering if the rate, fees and repayment term lower your total cost.
• You can’t realistically repay everything, but you can set aside money for offers: Settlement may be an option. Weigh the chance that a creditor will say no, along with the credit, collection, fee and tax risks.
• None of these repayment options fits, or you need legal protection: Learn how bankruptcy works and consider speaking with a qualified bankruptcy attorney.

Your debt balance is only part of the picture. Two people who owe the same amount may need different solutions because their income, expenses, account status, debt type, credit, savings and legal concerns are different.

Before deciding, look beyond the monthly payment:

• Amount repaid: How much of the original balance will you actually pay?
• Interest: What rate applies, and can it change?
• Fees: What will you pay at the start and over the life of the option?
• Time: How long could repayment or settlement take?
• Taxes: Could forgiven debt count as taxable income?
• Property at risk: Could you lose a home, vehicle or other asset if you can’t pay?
• If the plan doesn’t work: What happens if a creditor refuses, the payment becomes unaffordable or you need to stop early?

Still not sure which fits? Talk to a counselor for free. InCharge is a 501(c)(3) nonprofit credit counseling agency. During a free credit counseling session, you can review your income, expenses and debts, then talk through possible next steps. There is no obligation to enroll in a program.