January 9, 2024

Debt Management vs Debt Settlement

The difference between debt management and debt settlement lies in repayment, new debt amount, and credit impact. Read on for the detailed guide.

Debt management and debt settlement are debt relief strategies. But they work differently.

Debt management structures your debts and simplifies repayment. Debt settlement, on the other hand, reduces the principal amount of the debts you owe.

Which one is better for your financial situation? You'll find out at the end of the article.

Is Debt Management or Debt Settlement Better?

The better option depends on your goals.

  • Choose debt management if: you want a structured repayment plan fit for your financial situation. Your credit counseling agency will negotiate with your creditors. You just focus on making your monthly payments.

  • Choose debt settlement if: you want to reduce the principal amount of your debt. Your debt relief company will negotiate with your creditors so you can pay less than what you owe.

To explain it better, here's how debt management works.

Which method would you be more likely to use if you were looking to manage your debt?

How Does A Debt Management Plan Work?

A debt management plan or DMP eliminates the extra costs of debts (not the principal amount). It's typically offered by credit counseling agencies.

They negotiate with your creditors to reduce or remove interest fees, apply new debt terms, and waive other fees or penalties.

Debt Management Plan Process:

  1. Attend a consultation with a credit counselor.
  2. Credit counselors contact and negotiate with your creditors.
  3. Credit counselors create a debt management plan.
  4. You make your monthly payments to your agency.
  5. Credit counseling agency pays your creditors every month.

Payment arrangements depend on your DMP agreement. In most cases, you will deposit your money with the credit counseling agency, then counselors will disburse your payments to creditors.[1]

The goal of credit counseling agencies is to create a DMP you can afford for the next 3–5 years. Your monthly payment can be significantly less than your total monthly debt payments.

What's more? If you've fallen behind on your payments, credit counselors can negotiate with creditors to bring your account to current. This way, you save from late fees and penalties.

Having said all this, there are benefits and drawbacks to DMPs.

Debt Management Plan Pros and Cons


  • Structured way of paying multiple debts
  • Reduced interest rates, eliminated fees, and waived charges
  • Can improve your credit over time
  • You don't need to intentionally miss your debt payments before enrolling in a DMP
  • You get to learn more about your finances apart from debts


  • 3 to 5-year commitment
  • You can't enroll all types of debts
  • Creditors are not required to let you enroll your debt in a DMP
  • Credit counselors may advise you against taking new credit cards, credit lines, or new debts
  • Your credit can get negatively impacted at the beginning of the program

What are the disadvantages of a debt management plan?
One disadvantage is you can't enroll secured debts, like home loans and auto loans. Plus, it is up to your creditor if they will allow the credit counseling agency to enroll your debt in the DMP. You are also locked in a commitment to pay off your enrolled debts within a certain period.

If you're looking for an alternative approach, you can explore how debt settlement works in the next section.

How Does Debt Settlement Work?

With debt settlement, a debt relief company negotiates with creditors to lessen the principal of your debts. This way, you get to settle them for a lower amount.

Debt relief companies can also negotiate to remove interest, eliminate fees, and extend your debt's payment terms.

Debt Settlement Process:

  1. Attend a consultation with a debt relief company.
  2. Enroll in a personalized debt relief program.
  3. Set up a dedicated account for your monthly deposits.
  4. The debt relief company negotiates with your creditors for reduced debts. During this period, you also build up your money in your dedicated account.
  5. You pay off a creditor once you approve the negotiated debt. Otherwise, you can ask the debt relief company to renegotiate.

Although your debt relief company can negotiate to extend your repayment terms, not all creditors may accept this. Some creditors prefer getting paid a lump sum after accepting the reduced debt amount.

Debt negotiations can last for months. You must also intentionally miss your debt payments throughout the program.

Missed payments can negatively impact your credit score. But there are other downsides (and upsides) to consider.

How important is maintaining your credit score while resolving your debts?

Debt Settlement Pros and Cons


  • Reduce your principal debt significantly
  • Eliminate or lessen interest rates, fees, and charges
  • Resolve debts faster
  • Lessen calls from creditors
  • Avoid bankruptcy


  • Possibility of lawsuits
  • Creditors don't need to accept negotiations
  • Debt relief companies can have expensive fees
  • Your credit score may take a hit
  • You may owe taxes on forgiven debts
  • Negotiations can take time before you reach a settlement

Why you should avoid debt settlement companies?
Some debt settlement companies charge expensive fees. These fees are typically 15–25% of your total enrolled debts. Other companies may charge even more. That said, avoid companies that charge upfront. It's illegal to charge upfront fees before performing any service.[2]

Since debt management and debt settlement help you settle your debts, they do have their similarities.

Key Similarities

Debt management and debt settlement are both debt relief methods. Their goal is to make your debts more affordable.

With the two options:

  • You eliminate or significantly lessen your debts.
  • You get to pay lower monthly payments.
  • Creditors may contact you less.
  • You get to work with trained and experienced debt relief representatives and credit counselors.

What is the difference between debt settlement and debt management?
Debt settlement companies negotiate with your creditors, so you can settle your debt for a lower amount. Meanwhile, credit counseling agencies negotiate with creditors to enroll your debts in a debt management plan. With DMPs, you can get reduced interest rates and waived fees, but not necessarily a reduced principal.

Debt Management vs Debt Settlement: Detailed Comparison

If you're on the fence about which to go for, you can compare their fees, covered debts, and credit impact, among others.

Debt relief companies and credit counseling agencies offer free consultations. In this consultation, you will discuss your program or plan, plus the fees and costs associated with it.

What is your biggest concern when it comes to resolving debt?

Fees — Winner: Tie

It's hard to say whether you can save more from one option over the other. Debt relief companies charge you a percentage (typically 15-25%) of your total enrolled debts as their fee.

On the other hand, most credit counseling agencies charge a one-time setup fee for creating your DMP. Plus, you'll be charged a monthly fee for its management.

Setup fees can cost up to $75, depending on the credit counseling agency. Monthly fees can cost up to $75 per month.

Note that debt relief companies can only collect fees after you approve and pay your creditors. They're not allowed to charge upfront fees.

Covered Debts — Winner: Tie

In general, debt relief companies and credit counseling agencies only qualify unsecured debts like:

  • Credit cards
  • Credit lines
  • Personal loans
  • Medical bills
  • Store cards
  • Collection accounts

Secured debts like home or auto loans have collateral, so they won't qualify for a DMP or debt settlement. If you default on secured debts, your creditors can still go after your assets.

New Debt Amount — Winner: Debt Settlement

With debt settlement, the debt relief company can negotiate to reduce your debts by up to 50% off the principal. On the other hand, with a DMP, you pay your principal debt in full.

That said, both options can negotiate for lower interest, waived fees, and new terms (typically 3-5 years).

Credit Impact — Winner: DMP

You may experience a temporary decline in your credit score with a DMP. This usually happens when the credit counseling agency talks to your creditors to enroll your debts. As you make your monthly payments, your credit may improve over time.

Debt settlement entails more risks since you are deliberately missing your debt payments. You will gain negative items on your credit report, such as missed payments and late payments.

You may also get collection accounts and charge-offs when your original lender chooses to sell your debt to a third party.

Does debt settlement destroy your credit?
Yes, debt settlement can negatively impact your credit score and add negative items to your credit report. This is due to intentionally missing your monthly payments to help with negotiations. However, your credit may improve over time, especially if you finally settle the negotiated debts.

Program Duration — Winner: Debt Settlement

Debt settlement negotiations can take weeks to months before your debt relief company and creditors reach a settlement. The more debts you have, the longer it may take to finish the program.

With debt management, you get a new term agreed upon by the credit counseling agency and your creditors.

Having said that, debt management plans can last 3–5 years, while debt settlement can last 24–48 months (on average).

Did you know? You settle your debts faster with a DMP and debt settlement programs than by making a minimum monthly payment for each debt.

Use of Accounts — Winner: Tie

You can't use your enrolled accounts in a DMP and debt settlement program. So, if you enroll all your credit cards with either option, you can't use those credit cards until you settle them.

Creditors may also close your account as you work on paying off your debts.

Tax Implications — Winner: DMP

Once you enroll your debts into a DMP, there are no direct tax implications on your debts and payments.

For debt settlement, you may owe taxes if the forgiven amount on your debt is more than $600 (per debt). The forgiven portion is counted as taxable income.[3]

There's always a possibility that your creditors will take legal action against you with debt settlement. Remember, you are intentionally missing your debt payments. So, your creditors may file a lawsuit for your unpaid debt.

The same applies to your DMP if you miss your monthly payments. Your creditors can take legal action for the unpaid amount if your credit counseling agency can't pay your creditors because you've missed a monthly payment.

Some debt relief companies have wide partner networks, which include attorneys. They may offer legal support if your creditors file a lawsuit against you.

Are both debt management plans and debt settlement not for you? See some alternatives you can try instead.

Debt Management and Debt Settlement Alternatives

DMPs and debt settlement services aren't the only debt relief methods you can choose from.

  • Debt consolidation
    Debt consolidation merges multiple debts into one. Like DMPs, you only need to focus on one payment every month, simplifying repayment.

    There are various debt consolidation methods, with a debt consolidation loan being one of the most popular. You can use the loan to pay off multiple debts at once. However, the loan is only beneficial if the interest rate and fees are lower than that of the individual debts.

    Is it better to settle or consolidate debt?
    It is better to settle debts if you want to reduce the principal. However, this can negatively impact your credit since you must miss payments to negotiate with creditors. Consolidating your debts minimizes credit impact, so it can be the better option if maintaining your credit is your priority.

  • Bankruptcy
    Bankruptcy is a legal process where you file for the discharge of your debts or restructure your debts into a repayment plan. It can help you get a clean slate with your debts. But you'll get a negative credit impact on your report for up to 10 years.[4]

    Filing for bankruptcy can be tricky and tedious because of extensive paperwork and eligibility. It's best to work with a bankruptcy lawyer to assist you in your petition.

  • DIY debt relief
    It is possible to perform debt relief services yourself. You'll negotiate with creditors on your own for a lower debt amount. You can also create a plan to settle your debts aggressively.

Bottom Line

Choose a DMP if you can commit to a debt repayment plan lasting up to 5 years.

But if you want to pay the lowest possible debt amount, then you can try debt settlement. Just make sure you're willing to risk significant credit impact.

That said, there's no one right way to decide which method works for you. You can start by personally assessing your debts and your financial capacity to settle those debts.


  1. ^ Washington State Department of Financial Institutions. How Debt Management Plans Work, Retrieved on 11/25/2023
  2. ^ Federal Trade Commission. Debt Relief Services & The Telemarketing Sales Rule, Retrieved 12/13/2023
  3. ^ IRS. About Form 1099-C, Cancellation of Debt, Retrieved 12/13/2023
  4. ^ HelpWithMyBank.gov. How long can a bankruptcy stay on my credit report?, Retrieved 12/13/2023

Write to Alex Mambaje at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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