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The Difference Between Debt Management & Debt Settlement

Posted By:  |  April 14, 2014  |  0 Comment(s)


Author: Anthony Manganiello

Author of The Debt-FREE Millionaire and creator of

Debt management… debt settlement… what’s the difference anyway? I mean, they both help you get rid of debt right?

The truth is that there is a BIG difference between debt management and debt settlement. And it’s a difference you need to know about before you decide which service to explore.

Most people believe choosing between debt management and debt settlement is just that… a choice. However, while it seems that simple, it isn’t. What should really drive your decision as to whether to choose debt management or debt settlement is your personal cash flow. Let’s take a quick look at some of the differences between the two, and then we’ll elaborate on how personal cash flow should drive your decision if you’re considering one of these two services. From here on I’ll refer to Debt Management as DM, and Debt Settlement as DS.

Here are some highlights of the differences between the two services.

Pre-arranged/negotiated payments with creditors:

DM has – for the most part – pre-arranged/negotiated payments with most credit card companies. When you apply, they contact those creditors during the application process to see if they’ll accept those terms from you. Those payments usually involve lowering the interest rates significantly which helps to also lower the payment.

DS has no such arrangement and negotiations don’t begin during the application process with the service provider. Instead, it occurs after you’ve been on the service for a period of time, usually when you’ve accumulated enough to make a settlement offer, or when a creditor or collector begins to get aggressive.

Regular monthly payments made to creditors:

When you’re on a DM program, you make regular monthly payments to the service provider who, in turn, distributes those funds accordingly to all the creditors you’ve enrolled on the service. This distribution typically takes place within 30 days of your payment to the service provider.

When it comes to a DS service, payments are made dependent on when a settlement has been agreed to between all parties involved. Yet, even though your creditors may not be paid each month like in a DM program, you still must make payments into an account designated for the service. Since monthly payments are being made to said account, no “regular” payments are being made to your creditors.

Creditors Receive 100% of what’s owed them:

When you enroll in a DM program, creditors receive 100% of what you owe them plus a lowered amount of interest.

When you enroll in a DS program, creditors receive between, on average, between 30 and 50 percent of what you owe them.

Potential for collections:

While both programs offer the potential for you to be the recipient of collection calls and/or letters, a DM program offers a MUCH lower likelihood of this occurring.

In contrast, a DS program offers a rather high likelihood of your accounts winding up in collections, because your creditors aren’t being paid each month as in a DM program. Typically this is by design and what creates an environment where the settlements for less than what you owe can take place.

Service payment flexibility:

Both programs offer some level of flexibility. However, a DM program – for the most part – locks you into a payment plan. This is because when your creditors agree to the terms previously mentioned, they want those payments every month.

For a DS program, since there are no “regularly scheduled” monthly payments being made to creditors, some additional flexibility is available. However, if you’re in the middle of making a payment (or payments) on a settlement you’ve agreed to, that flexibility disappears because failure to complete payment on a negotiated settlement can invalidate that settlement completely.

Interest paid on your accounts:

In a DM program, even though interest is usually lowered on your accounts, interest is still being charged. So you’re paying back 100% of the principal PLUS interest.

On a DS program, while your accounts are going through the collection process, interest and late fees will most likely accrue. However, the settlement process usually results in you paying less than the original principal balance you owed when you enrolled.

Ability to use the accounts on the service:

In both a DM and DS program, any account you enroll in the program can no longer be used.

Can you keep an account off of the service?:

In both services, it is possible to keep one account off the service for specific purposes. Those circumstances would need to be discussed with the service provider to determine what possibilities exist.


There once was a time when DM services were offered for free. However, those times are long gone. DM services all charge fees and those fees are determined by your state of residence. Typical fees can be something like $10/account on the service up to a maximum of $50/month. Again, your state of residence determines the maximum you can be charged.

DS services used to charge a variety of fees. However, nowadays, you’re usually only charged what’s referred to as a settlement fee. A settlement fee is usually a percentage of what they save you. For instance, if you have an account with a $1,000 balance and they negotiate a settlement of $500, you’ve saved $500 and that’s what the percentage is based on. There may be additional, nominal monthly service fees – IF – your state of residence allows them to be assessed.

There are some additional fees that you may be charged, however they vary from service to service. Be sure to inquire during the enrollment process as to ALL fees you may be responsible for.

Impact on your credit:

Both programs can have a negative impact on your credit. Between the two, a DM service will have the least negative impact.

Because while you’re on a DS program, regular payments aren’t being made, and accounts typically wind up in collections the negative impact on your credit can be severe.

You may be looking at this list of differences and thinking “which service should I choose?” However, in the beginning I mentioned the real decision maker should be your personal cash flow. As I outline in my book, The Debt-FREE Millionaire, I always suggest that – if you can afford the payment – you should choose a debt management program. The only time you should seriously consider a debt settlement program is when you can’t afford the payment required for a debt management program, and you want to avoid bankruptcy.

Neither of these services should ever be considered as a way to “save money.” Instead, they should be considered as a means to transform negative personal cash flow positive for the purposes of becoming completely debt free. Because becoming completely debt free should always be your ultimate goal.

If you’re interested in checking out some of the companies we recommend in these industries, you can find them here: debt relief company reviews.


  • How important is it to you for a debt consolidation company to offer financial education resources?
  • Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
  • Negotiates with your creditors on your behalf.
  • Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
  • Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
  • Combines all your debts and creditors into one monthly payment.
  • Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
  • You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
  • Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
  • Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
  • Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
  • Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
  • Borrowers can receive funds from their loan within only a few days.

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