Many of us have been there… our credit card debt is mounting. The increased interest rates aren’t helping matters, and we are starting to feel like we need a plan.
When you are first starting out on your path to become debt free, it can be very overwhelming. After internet searches, and reading some articles, you see that debt management and debt settlement come up often. But what is the difference and how do you know what is right for you?
Debt Management Plan (DMP)
Debt Management Plans (DMP) are typically offered by non-profit credit counseling agencies (like Parachute!) It’s a plan between you and the credit counseling agency designed to repay your unsecured debts in full within 5 years or less. The agency will negotiate with your creditors to lower your interest rates, lower monthly payments, and stop fees. One monthly deposit is made to the credit counseling agency, then your funds are distributed to your creditors every month. You don’t have to be behind on your debt to enroll, and since the companies offering DMPs are typically non-profit, the fees for service are low. You will review your finances, credit and goals with a certified credit counselor who can help you understand your options.
Debt Settlement is when your debt is settled for less than the full amount you currently owe, typically in one lump sum payment. You usually cannot settle your debts without being significantly past due, or in default. Any amount of debt forgiven over $600 is considered taxable income by the IRS. For example, if owe $8,000 on a debt, and the creditor agrees to a settlement amount of $5,000, you will owe taxes on the $3,000 forgiven by the creditor. You can negotiate a debt settlement yourself, but there are for-profit companies that you pay to hold your money to save up enough to settle the debt, and to help with negotiations. Fees can be high, and you risk further damaging your credit and lawsuits from creditors that are not willing to settle or wait until you’ve saved enough money to pay the settlement.
What is the difference between a DMP through a credit counseling agency and a Debt Settlement Company?
|Credit Counseling Agencies that offer Debt Management Plans
|Debt settlement companies
|Usually non-profit organizations
|Usually are for-profit companies that charge a fee for their services. Generally, these companies cannot charge you until after they perform services
|Advise you on managing your money and debts and help you budget your payments
|Offer to arrange settlements of your debts with creditors or debt collectors
|Reach agreed upon payment plans or agreements with your creditors to ensure that the creditors will not pursue collection efforts or charge late fees while on the plan
|Often have no up-front agreements with creditors. Some creditors will not negotiate with debt settlement companies
|Usually do not negotiate any reduction in the amounts you owe – instead, they can lower your overall monthly payment
|Typically offer to pay off your debts with a lump sum payment that you save up in an independent account that you control
|Do not advise you to stop paying your debt, but may help negotiate your monthly payments
|Usually advise that you stop paying your creditors until a debt settlement is negotiated with creditors, which may damage your credit and result in your being sued
|Payment plans do not usually have tax implications
|Debt settlement may involve debt forgiveness, which may have tax implications
As always, your financial situation is unique to YOU! There is no one-size-fits-all solution to resolve debt. In fact, these are only two options that we’ve highlighted here.
In order to start your debt free journey, we encourage you to speak one-on-one with a Certified Financial Counselor who will thoroughly review your income and expenses, explain your credit report and score, analyze your debts, and provide you with expert action steps to resolve your debt. Parachute is here to help! Contact us to start your debt free journey! 716-712-2060 or www.parachutecreditcounseling.org
Dare to be Debt Free!