Debt Management vs. Settlement: What's the Difference?
If you have credit card debt, we’ll explain the difference between debt management and debt settlement.
Contributing Writer at Tally
July 1, 2021
The average American debt in 2020 was $92,727 per person, according to Experian. If you are in debt, you may be considering a debt management strategy to help cut down on how much you owe.
When determining your debt payoff strategy, you will likely come across two terms: debt management and debt settlement.
Today, we'll outline the difference between debt management and debt settlement. We'll cover each one, the differences between the two and why they are important. By the end of this article, you should have a much better understanding of which may be best for your financial situation.
What is Debt Management?
A debt management plan is when you combine multiple debts into one. Doing so guarantees that you only have to worry about one single monthly payment. It often means that you will have a lower interest rate as well.
Repayment occurs over the course of three to five years. It may vary by lender, but you often can't open new lines of credit or use a credit card while under a debt management plan.
Debt management plans are typically designed for credit card debt. They do not allow you to roll in other types of debt, such as your:
If you wish to sign up for a debt management plan, you’ll need to speak with a nonprofit credit counseling agency.
Though a debt management program (DMP) is useful if you have credit card debt, it is not necessarily the best option.
For instance, if you have a good credit score, you may want to look into personal loans or balance transfer credit cards instead. These debt relief options can be more accessible. Personal loans allow you to use the funds as you see fit. Balance transfer cards often come with a promo period that allows you to pay off your balance without collecting additional interest.
What is Debt Settlement?
Debt settlement is a less proactive way of getting out of debt. To settle your debt, you withhold payments on your debt until your lender considers your account delinquent. At this point, you ask your lender to settle with you for a lesser amount.
For instance, let's say that you owe $10,000 in debt. You refuse to pay it, even as you begin to receive debt collection calls. You contact your lender and aim to settle for $3,000. The hope is that the lender will find the debt settlement program attractive enough to take it under the mindset that it's better to receive some payment than none at all.
While debt settlement can absolve you of having to pay your total debt, it can wreak havoc on your financial future. Your credit report will display late payments, and your credit score will plummet. Your lender also has the right to sue you for your outstanding debt. During the time when you're forcing your account into delinquency, you will also accumulate late fees, which will increase your total amount owed. Lastly, there is no guarantee that your lender will settle.
There are debt settlement companies that you can use to help with this process, but it's also possible to do this on your own.
Ultimately, the only reason you should consider this strategy is because you are already near delinquency. At this point, the damage to your credit score would already be done. Getting out from underneath any amount of debt would help in pressing the reset button and rebuilding your credit.
What are the Key Differences Between Debt Management and Debt Settlement?
When comparing debt management vs debt settlement, the difference comes down to the fact that one is proactive and one is reactive.
Contacting credit counseling services and working through a DMP can have a positive impact on your credit history and lead to you becoming debt-free. You work with a certified credit counselor to come up with a repayment plan for your existing debt.
During this time, credit card companies and debt collectors are not able to contact you, allowing you the opportunity to pay off your debt. As you make minimum payments on-time and reduce your overall debt, your credit report should improve.
Debt management plans can also help when budgeting. Because the plan spans over a predefined period of time, you know both the lump sum you need to pay off as well as the cost of monthly payments. Knowing that you need to pay off a certain amount each month can help when managing your personal finances.
A debt settlement program, on the other hand, is much more of a reactive debt solution. You should only use it when you have missed payments and are already receiving collection calls because your account is at or near delinquency.
However, if you are not already near delinquency, purposefully driving your account into delinquency is risky, as it will harm your credit score, doing damage that could take years to overcome.
Additionally, you will be working with your lender to try to find a solution or compromise to your debt. Your lender is by no means obligated to accept your offer. The lender is owed back every cent that you borrowed and could take you to court for these funds. So, in some regards, debt settlement can be a risky decision, as you are very much at the liberty of your lender.
For this reason, debt settlement is not helpful from a budgeting perspective. You won't know exactly how much you owe until you negotiate with your lender, making it quite challenging to manage.
How Can Tally Help Manage Debt?
Even though debt management is typically superior to debt settlement, there are other options available that could be even more appealing. One such example is Tally, a credit card payoff app.
Tally is similar to a debt management program in that you use Tally’s lower-interest-rate line of credit to pay down your higher-APR credit card debt. However, if you qualify, instead of meeting with credit counselors to come up with a debt management plan, you receive a line of credit.1
With this line of credit, you can pay off your outstanding credit card balances. The line of credit is revolving, meaning you can pay it back and reuse the funds over and over again. Not only can Tally save you money, but its automated processes ensure you get out of debt as quickly and efficiently as possible. And unlike a DMP, you can continue to use credit cards while using the Tally line of credit.
Choosing an Effective Strategy to Get Out of Debt
If you have credit card debt, it's important that you know the difference between debt management and debt settlement. Debt management is a hands-on approach, as you work with a credit counselor to pay down your debt within a certain period of time. You consolidate your debt and don't have to worry about making multiple payments.
Debt settlement is a last-resort option that you should only use if your account is already in delinquency. Otherwise, you will end up ruining your credit score, complicating your financial future. There is no guarantee that your lender will accept debt settlement offers either.
A third option is to use a Tally line of credit. Tally is similar to a debt management plan, except you can continue to use your credit cards and you pay off the line of credit at your convenience. It's a viable alternative that’s similar to a balance transfer card. It's worth considering if you are looking to get out of debt twice as quickly2 as you would should you not use it.
1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.
2Up To 2x Faster with Tally+ Express – 50% of Tally+ Express members can get out of debt about 3 years, or 41%, faster with Tally+ Express. The stated estimates reflect potential time to pay off debt for an appreciable number (at least 10%) of Tally+ Express line of credit users. We calculated the estimates in March 2021, based on Tally’s records for borrowers who enrolled in Tally from November 2018 through October 2020. We compared how long it would take for a user to pay off their credit card debt if they had received and accepted a Tally+ Express line of credit and compared that to how long it would take for a user to pay off their credit card debt without Tally. For each borrower we used: (a) their average APR weighted by their initial credit card balances and APRs; (b) an average monthly payment of 3% of their credit card balance(s); and (c) average monthly credit card transactions of 0.8% of their credit card balance(s). We assumed the borrower received Tally+ Express discount credit every month. Actual pay-off rates will vary based on factors such as each user’s credit card APRs, the total payments made, and additional credit card charges.