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The difference between debt settlement and debt management

Q. I recently received an advertisement that outlined the benefits of working with a debt settlement company. According to what I read, debt settlement can offer faster results than credit counseling can. It said resolving debt using credit counseling can take more than five years.  I’m confused about the difference between debt settlement and credit counseling. Can you explain the difference to me?

A. Debt settlement (sometimes known as debt relief) is not the same thing as a debt management program offered by a non-profit credit counseling agency. Unfortunately, many consumers are confused about what kind of program they have enrolled in when they’ve sought help repaying their debts.

In a debt management program, you send in a single payment, which the credit counseling agency forwards to all of your creditors on your behalf. The credit counseling agency works with your creditors to accept an agreed-upon monthly payment and asks them to reduce or waive fees and interest. When you make monthly payments in a debt management plan, your debt goes down. And as you reduce your debt, your credit score increases.

The length of a debt management program will depend on the amount of your debt and the amount you pay toward what you owe. In many cases, a consumer can complete a debt management program in less than 36 months.  

On the other hand, a debt settlement company collects a monthly payment from you. But instead of using this money to pay your creditors, it holds what you pay them until offering a lump sum payment (or settlement) to one of your creditors. In the meantime, all of your accounts continue to go delinquent, and you continue to accrue interest and late fees. 

Our counselors frequently work with unsuspecting consumers who get trapped in debt settlement programs. These consumers explain that they are making payments, but that their creditors are not getting paid. Not only is their credit getting worse, but they often aren’t able to get a hold of anyone at the company to discuss this.  

As a rule of thumb, if the company you are working with tells you not to talk to your creditors, advises you to change your address to theirs, or fails to send your creditors any payments, then you have enrolled in a debt settlement program.  

If you want to settle a debt, there’s no need to pay thousands of dollars to a debt settlement company. You can make a settlement offer directly to your creditors yourself, though keep in mind that whenever you settle a debt by yourself, or through a company, this information will show up on your credit report as a settlement, meaning that the debt was not paid in full. A settlement will negatively influence your credit score, and you will end up owing taxes on the forgiven debt. 

However you choose to handle debt repayment, I encourage you to make certain you know what you are signing up for before you sign any agreements. Don’t be fooled into signing up for a debt settlement plan if a debt management plan is what you truly want.

Bonnie Spain is the executive director of Consumer Credit Counseling Service of the Black Hills, a United Way member agency. For more information, email

The material in this transmission is provided for personal, non-commercial, educational, and informational purposes only. ACCE makes no representations or warranties with respect to the accuracy or completeness of the contents of this transmission and assumes no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. You should consult a professional where appropriate.

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