10 reasons you might want to consider debt management

Are you swimming in debt and not sure how to handle it? Mike Sullivan, personal finance consultant at Take Charge America says two of the most popular strategies for people to get out of debt are debt management and debt settlement.  While they sound similar, there are key differences.

“Debt management is a process whereby a consumer pays off his or her accumulated debt over a period of years, in conjunction with agreements with the credit card companies,” he says. “It is a long-term process that helps you get out of debt by working with creditors. Debt settlement, on the other hand, is a hugely somewhat shorter process to get out of debt by confronting the creditors and refusing to make payments until they agree to settle for less.”

Sullivan believes that debt management is almost always the best option for consumers. He says there are 10 things to keep in mind when considering debt management or debt settlement:

Objective advice

A debt management plan is offered by a non-profit credit counseling agency. Sullivan says not only are those companies closely regulated by the federal government and some states; they are also audited. He says on the other hand, debt settlement companies are for-profit agencies and are less likely to be regulated.


Non-profit credit counseling agencies are educational entities. Sullivan says their first responsibility is to educate consumers on how to manage their debt.

“The goal is to not only make sure they get out of debt, but they do a better job going forward of managing their money and avoiding debt,” he says. “There is no such requirement for a debt settlement company and typically they don’t focus on education.”

Monthly payments

Monthly payments to a debt management program go toward paying off your debt. Sullivan says it’s the responsibility of the credit counseling agency to make timely payments every month to your creditors to get you out of debt.

With debt settlement, your monthly payments will be deposited into an account. The money will continue to grow until the debt settlement company is able to use the funds to pay the settled amount with the creditors – that is, if the creditors agree to the settled amount. He stresses that there’s no guarantee of a settlement.

“It happens frequently that creditors refuse to settle,” Sullivan says. “Often before the settlement is reached or the settlement is even funded, the creditors have already sought a judgment and garnished your wages.”

Total repayment

The prospect of paying less than what you owe is an enticing option for many people considering debt settlement. With debt settlement; the goal is to repay only 50% or so of your debt. However, Sullivan says the goal of debt management is to repay 100% of your debt.

“It’s a difference and distinction that consumers need to understand,” he says. “One is repaying all of your debt, the other is settling and not repaying all of your debt.”

Interest rates and fees

Sullivan says with debt management, typically you start out immediately with reduced fees and reduced interest rates. As a result, your debt is costing you less. With debt settlement, it’s the opposite. He says your interest rates, fees and penalties are likely to be added to your balance every month until a settlement is reached.

Credit score

As you aren’t making any payments to creditors with a debt settlement plan, Sullivan stresses that debt settlement can completely destroy your credit. While debt management by law cannot impact your credit score or credit rating directly, he says that doesn’t mean there can’t be an indirect impact. As you aren’t using as much credit on a debt management plan, eventually, you may see your credit score go down slightly. But Sullivan notes that the drop is nowhere near what you would see with debt settlement.


While there are fees for both programs, Sullivan says debt management fees are controlled by the states and are typically much lower.  Debt settlement companies can’t charge an upfront fee. They typically charge a percentage of the amount of enrolled debt.

“If you have $10,000 that you have basically agreed to - perhaps 20% of that, or $2,000 will be their fee,” he says.

Collection calls

Sullivan says the number one reason consumers contact credit counseling agencies is to stop collection calls. Enrolling in a debt management plan does stop the collection calls, as the creditors agree to stop those kinds of collection efforts. But it’s not the same with debt settlement.

“Debt settlement doesn’t stop any collection calls,” he says. “In fact, they may increase as the creditors make a concerted effort to try to collect before any settlement is reached.”

Tax charges

Once your debt is forgiven under a debt settlement plan, it becomes taxable income. Sullivan says depending on your tax bracket, it can cost you 10% to 20% of the amount that is forgiven. The taxes will be payable in the next year. There are no tax implications for debt management.

Choose the right plan

Sullivan believes that a debt management plan is almost always the best choice for consumers who qualify. In order to qualify, you must be able to pay off the debt in 60 months and take care of your normal expenses at the same time. If your finances are really bad, he says the only other options would be bankruptcy or debt settlement.

“I will admit to being somewhat biased,” Sullivan says.  “If your financial situation is already completely ruined and you have no chance of recovery, debt settlement might be the best option. But if you still have a chance to recoup your credit over a period of years and you still have a chance to pay off your debt and succeed financially, then debt management is almost always the better option.”

Whatever you decide to do, he says it’s important to reach out for help.

“When somebody recognizes they have a debt problem, they should call a certified credit counselor,” Sullivan says. “Find them in the Better Business Bureau to make sure they have an A+ rating and go through the process. That doesn’t commit you to do anything and doesn’t cost you anything.”

Linda Bell joined FOX Business Network (FBN) in 2014 as an assignment editor. She is an award-winning writer of business and financial content.  You can follow her on Twitter @lindanbell