Debt management and debt settlement are both effective ways to get out of debt. They each have their pros and cons. If you are torn between the two, you need to know your financial capabilities in order to make the smart debt relief decision. It is not about how much you can save but more of what you are willing to sacrifice to get to your intended financial goals.
In most cases, people are focused on getting as much savings from their debts. This is why debt reduction is sweet music to them. If that is important to you as well, then debt settlement should be your first choice. However, debt freedom is more than just paying off what you owe and getting the most savings out of it. In some cases, paying for your debts in full is more beneficial in the long run. And if your problem is the high monthly payments, debt management can help solve that.
Here are some reasons why debt management may be better than debt settlement.
Takes better care of credit score. If you have plans for your future personal wealth and you know that you need financial aid for that, you need to take care of your credit score. Debt settlement can ruin your score because you will be asked to default on your payments to prove that you are in a financial crisis. This is something that you do not have to do in debt management.
Creditors are more inclined to cooperate. There is no debt reduction in debt management so you can expect that creditors will be more cooperative. Also debt management companies usually have an agreement with creditor already. You are relying on that relationship so that the creditor can allow you to make lower payments every month. This is not so true in debt settlement. You will be haggling with them so they forgive a portion of your debt. That means less profit for them so they will be fighting you every step of the way – or at least make it difficult to arrive at an agreement.
Will not cause as much in service fees. This is actually a tricky issue that can go either way – depending on your debt amount and the settlement agreement. Debt settlement companies usually charge depending on how much debt you enrolled. So if it is a big amount, you can expect it to be quite big as well. The average service fee is 20% and if you have $7,500 in debt (which is the minimum amount that settlement companies usually require) that means the service fee is $1,500. But if it is bigger like $30,000, the fee will be $6,000. In debt management, the government placed a cap of $50 every month. If you complete the 5 years, you end up paying $3,000. Do the math before you really decide which program is best based on their service fee.
Any saving will not be taxed. In debt settlement, any debt forgiven that is above $600 is considered a taxable income. Although you can request from the debt collector that the amount you saved should not be taxed, there is a chance that they will not agree. So be prepared that the forgiven amount on your debt will be taxed. In debt management, since there is no reduction, there is no taxable income.
Although this paints debt settlement at a disadvantage, you still have to realize that the lack of debt reduction in debt management will require you to have a steady income to afford payments. Debt settlement will take 4 years or less – depending on how fast you can come up with the settlement amount. In the other debt solution, you have to follow the structured payment plan that was created for you – which will take as long as 5 years. Make sure your income will not falter within this time because creditors will be very strict about you meeting your payments.
So do not close your doors on either of these programs – just look at your finances and be honest about what you are willing to sacrifice in the long run.