Difference Between Debt Settlement And Debt Management
When people are finding their way out of debt they weight their options and try to decide which is better and more productive for them. Two of the most possible routes are debt settlement and debt management. Many believe that these two programs are similar if not the same – but there is actually a bit of a difference. Understanding each purpose that they have could help to decide which one to take advantage of.
In a debt management programs (DMP) - the credit counseling agencies works to lower the interest rate on the credit card account in hopes of lowering the monthly payment and causing more funds to go towards paying off the principal instead of the interest charges. The result of this is faster payoff of enrolled debts, within 60 months.
The payments for different debt accounts are consolidated into one payment to the credit counseling agency who then distributes the payment to each creditor based on a scheduled repayment plan. Debt management usually charges a set up fee and a small monthly fee, however most are non-profit companies. They send out proposals to all creditors to propose new payment arrangements.
In a debt settlement program, the debt settlement company negotiates with the creditor to lower the outstanding balance of the debt. Usually to enroll in a program with a debt settlement company there is a power of attorney that must be signed. This allows them to contact all of the cardholder’s creditors. The debt settlement company does not negotiate lower interest rates and does not distribute monthly payments to creditors.
The debt settlement company, usually through a third party payment processor, arranges for paying off debts once a reduced-balance settlement agreement is reached between the debtor and the creditor. The debt settlement client does make monthly deposits into their settlement fund, usually managed by an independent, third-party payment processor.
Most creditors will negotiate with a third party to settle consumers debt. Before deciding on a debt settlement or debt management plan one may want to contact each of the creditors to see what can be done. Some creditors offer hardship programs to the consumers in an effort to prevent the account from charging off. Contacting the creditors directly will accelerate the collection process. It is best to contact the creditor directly only if you are financially able to make a payment as well as a monthly commitment for payment to the creditor.
If you are not able to pay every month then you may be hurting yourself by contacting them, as they will accelerate the collection process, which may lead to a potential lawsuit against you. A debt settlement company’s goal is to stay the collection process as much as possible to allow ample time for the debtor to store enough funds to pay a settlement. If the collection process has already been accelerated by your contact with them, then you may run into difficulty in settling your accounts.