Debt Settlement

Debt Settlement is making a deal with creditors to pay less than the total balance owed. As attractive as that sounds, there are some severe penalties, notably to your credit score and tax liabilities.

Debt Settlement usually involves attorneys. There are fees involved, typically a percentage of the settlement amount, which can be significant.

Typically, the attorney asks the client to stop making payments to the creditor and instead, contribute money on a regular basis to a fund. When the fund reaches a certain level, the attorney will approach creditors and seek an agreement to settle for that amount.

The client will be expected to provide the creditors with documentation of their financial status, meaning income, assets and all debts. Creditors want verifiable proof that the person can’t pay before they agree to a Debt Settlement. They are very suspicious of someone just trying to save money by paying less than they owe.

If the creditor accepts the agreement, the debt is considered settled. However that is not the end of the story.

The client must report the amount forgiven on their taxes as income. For example, if the creditor forgives $5,000 of a $10,000 debt, that $5,000 must be reported to the IRS as income and the client must pay taxes on it.

Finally, there is the matter of how it affects a credit score. In the above example — $5,000 forgiven on a $10,000 balance – the credit score companies see that as a negative because only half the debt was actually paid.

The person ran up $10,000 in debt, but paid only $5,000 of it. There is concern about the risk of not having a debt paid in whole in the future, thus there is a negative impact on the overall credit score.

The client will be expected to provide the creditors with documentation of their financial status, meaning income, assets and all debts. Creditors want verifiable proof that the person can’t pay before they agree to a Debt Settlement. They are very suspicious of someone just trying to save money by paying less than they owe.

If the creditor accepts the agreement, the debt is considered settled. However that is not the end of the story.

The client must report the amount forgiven on their taxes as income. For example, if the creditor forgives $5,000 of a $10,000 debt, that $5,000 must be reported to the IRS as income and the client must pay taxes on it.

Finally, there is the matter of how it affects a credit score. In the above example — $5,000 forgiven on a $10,000 balance – the credit score companies see that as a negative because only half the debt was actually paid.

The person ran up $10,000 in debt, but paid only $5,000 of it. There is concern about the risk of not having a debt paid in whole in the future, thus there is a negative impact on the overall credit score.

Debt Consolidation

Debt Consolidation Programs involve packaging all debts together and paying them off by taking out a loan at reduced interest rates. The lower rate is often secured by using other assets, such as a home or automobile.

For example, a person with three or four credit cards, might owe a combined $20,000 on the cards and be paying something like 24 percent interest. The credit counseling agency representing him could go to a bank and negotiate a loan at half that rate and save quite a bit of money in interest.

The loan money would be used to pay off the credit cards, creating a zero balance on each card. Instead of making three or four payments every month, the person would have only one payment.

There are some similarities between Debt Consolidation Programs and Debt Management Programs, but one glaring difference: Debt Consolidation Programs don’t require a client to give up their credit cards. That leaves the temptation to run up more debt, which only extends the problem.

The loan money would be used to pay off the credit cards, creating a zero balance on each card. Instead of making three or four payments every month, the person would have only one payment.

There are some similarities between Debt Consolidation Programs and Debt Management Programs, but one glaring difference: Debt Consolidation Programs don’t require a client to give up their credit cards. That leaves the temptation to run up more debt, which only extends the problem.

Did You Know


On average, InCharge is able to reduce the interest rate by 6 to 9 percent. If the rate goes down to 7 percent, the monthly payment drops to $381 (including the average monthly fee of $22). The total paid is $18,669 and only $2,243 in interest. The total saved over 48 months is $3,675.

Responsibilities in a Typical DMP

A successful debt management program involves serious discussions among consumers, creditors and InCharge credit counselors to construct a plan that eliminates all debts and steers the consumer toward responsible use of credit.

Each party has a role in building a foundation for success. The consumer’s role includes:

  • Honesty and accuracy about income and expenses. This is crucial to your success. Use the most recent examples of both when speaking to a credit counselor.
  • Stick closely to the recommended budget and spending plan created for you.
  • If your current budget has a negative cash flow, you should focus on cutting expenses or increasing income. The 2015 National Financial Capability Study reveals 40.5% of American households spend more than they earn. That is a recipe for financial disaster.
  • Use monthly account statements from InCharge and creditors to track your progress.
  • Do not accept new credit cards. Incurring new debt slows your path to being debt free.
  • Make use of the free education tools and resources InCharge offers for help in managing debt. They will help you acquire good spending habits.
  • Make full payments, on time, every month. This is the No. 1 way to eliminate debt and improve your credit score.

InCharge’s responsibilities include:

  • Credit counselors will do a complete review of your financial situation that will include tips on eliminating debt and increasing income.
  • Produce itemized budget as a monthly spending guide.
  • Represent you in dealing with creditors to lower payments, interest rates and late fees to a level you can comfortably afford each month.
  • Offer monthly statements on how much money each creditor was paid and balance due on each account.
  • Answer any questions or concerns while you are in the program.
  • Provide education material that helps you understand the cause of debt and tips on how to manage debt.
  • Continue offering useful tools and resources via emails, newsletters and other resources when you have finished the program to keep you on the road to financial success.

The creditor’s role is:

  • Accept terms of repayment proposed by counselor that you can manage.
  • Waive any late or over-the-limit fees.
  • Credit each payment made in full and provide you with monthly statements.
  • Update national credit reporting agencies as you make progress paying down debt.

When you complete program, inform credit bureaus that consumer paid all debts in full.

Debt Management Frequently Asked Questions

What is a Debt Management Plan?

A debt management plan (DMP) is a program to assist consumers in eliminating debt, while educating them on responsible ways to avoid debt. The trained and certified credit counselors at InCharge work with you and your creditors to arrive an affordable monthly payment plan to pay off the debt in 3-to-5 years.

How will a debt management program affect my credit score?

InCharge does not report your participation in a debt management program or plan to the credit bureaus, however your creditors might. Your credit score may decrease when your credit cards are closed and then increase as you make consistent on-time payments over the course of the program. Every person’s credit situation is different. In order to better understand how a debt management program may affect your credit score, learn more about how credit scores are calculated.

How can I choose the best plan for me?

Make sure you are working with an NFCC-member nonprofit credit counseling agency like InCharge Debt Solutions. Nonprofit credit counselors provide impartial financial advice that has your best interest in mind. A nonprofit debt management program will have low fees and work to secure interest rate reductions on your credit card debt, so that you are able to pay off your debt by making consistent affordable payments.

How fast can I pay off my debt on a debt management program?

You should be able to pay off your credit card debt in 3-5 years on a debt management program or plan. Your payment will be based on five years of equal installments, paid monthly, but you can pay your debt faster. While you are on the program, we will share cost-savings strategies that will free up more of your household income to pay off debt.

What are the debt management program’s fees?

If you decide to participate in our debt management program, there is an average set-up fee of $40, and an average $25 monthly fee, not to exceed $75 and $55, respectively.

Will InCharge allow me to use credit cards?

InCharge recommends that you suspend use of credit cards while paying down your debt. You may choose to keep one credit card account open for emergency or business use.

How would I enroll in a debt management program with InCharge?

To start the process, call one of our credit counselors at 800-565-8953 or fill out our Get Help Now form. You will receive a free credit counseling session and our counselors will tell you if you qualify for a DMP.

What are the fees to enroll in your program?

InCharge’s fees vary because they are regulated by states. The fee structure can range from $0 to $55, depending on where you live. The number of accounts and amount of debt you place in the program also affects the fees. Some fees can be reduced in hardship situations. The average monthly fee at InCharge is $25.

How long will it take to complete InCharge’s debt management program?

The average length of a DMP is 3-5 years, but is shorter for clients who decide to aggressively deal with their debt. Many clients pay down debt faster by using income tax returns, inheritance money or some other unexpected source of income. There is no penalty for paying the debt off early.

What benefits can InCharge provide with its program?

The top benefit is a reduction in both monthly payment and interest rates. There is the convenience of making only one payment for all your debts. You also receive valuable education materials, including financial tips and reminders for payments due. InCharge clients receive a monthly statement that details payments made to each creditor and a progress reports on how much of the debt has been paid.

Does InCharge keep my information confidential?

All information shared with InCharge is confidential. Please see our privacy policy for details.

Will enrolling in a DMP improve my credit score?

Enrolling in a DMP with InCharge will not impact your credit score, but the closing of your credit card accounts may have a temporary negative impact. When you close credit card accounts, it reduces the amount of available credit you have, which is one of the key factors in determining a credit score. However, as you make on-time monthly payments to the program, they are recorded by your creditors and have a positive impact. On-time payment is the biggest factor in determining your credit score so eventually, your score will reflect that you paid your debts.

Do I have to include all of my bills in a debt management program?

Only unsecured debt – credit cards, repossessed cars, medical bills, debts that have gone to a collection agency, etc. – can be included in a DMP with InCharge. Mortgages, auto loans or current utility bills do not qualify.

How will enrolling in a DMP affect the interest rate on my credit accounts?

One of the benefits of enrolling with InCharge includes significant reduction on interest rates from participating creditors. For example, you could see you the interest rate on your credit card accounts drop from 25% to as low as 2%, with the average being somewhere around 9%.

Can I enroll in your program online?

A credit counseling session can be completed online. However, if you choose to enroll in the DMP, you will be contacted by our credit counselors to confirm the information you provide and the benefits you’ll receive.

Is a debt management plan the only solution you offer?

After reviewing your situation and credit profile, our credit counselors may recommend an alternative solution such as bankruptcy.

What is the difference between bankruptcy and a debt management program?

Bankruptcy is a last-ditch attempt to settle debts. It is a legal proceeding through which you liquidate all assets in order to wipe out debt (Chapter 7) or persuade creditors to approve a repayment plan over a 3-to-5 year time frame to eliminate debt. There are severe consequences for both, including a drop of as much as 200 points in your credit score and the bankruptcy action remaining on your credit report for 7-to-10 years. A debt management program is not a legal proceeding. A notation that you are in a DMP could appear on your credit report, but there should be little impact on your credit score until you complete the program. At that time, you could expect your credit score to improve, sometimes dramatically.

Will InCharge stop creditors from calling me?

When you enroll in a DMP and start making payments, the calls from your creditors will end.

How will creditors find out I joined a debt management program?

InCharge credit counselors contact the creditors to make them aware you are participating in the program and request concessions on interest rates and monthly payments. You also receive responses from creditors once proposals are accepted.

What happens if I can’t handle the payments?

InCharge counselors work with you to establish a debt management plan that allows you to make affordable payments every month. If your financial situation changes, call InCharge immediately and our credit counselors will review your situation.

Debt Management App

InCharge Debt Solutions clients have access to the “I’m InCharge” Debt Management App that makes managing your accounts, checking your balances, and rescheduling payments easy and convenient. I’m InCharge also allows you to check your progress in real time, providing details on your progress, including how much debt you’ve paid off, how much debt you have left and your up-to-the-minute “debt free” percentage, as in “You Are 55 percent Debt Free.” Research shows that tracking a goal makes you more likely to stay motivated and accomplish it. With the Debt Management App, InCharge strives to be the “Fitbit” of the personal finance world.

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