Debt Relief vs. Debt Management: Which Is Right for You?

You've probably heard the terms debt relief and debt management thrown around like they mean the same thing. The truth is, they're actually quite different. Debt relief works to lower the amount you owe. While debt management can helps you pay off what you owe in full with (hopefully) better terms. Let's break down the difference between the two to help you pick the path that best fits your needs.

Key Takeaways

• Debt relief (oftentimes called debt settlement), is where a for-profit company negotiates with your creditors on your behalf so you (ideally) pay less than the full balance, though it can hurt your credit and there's no guarantee creditors will agree.

• A debt management plan (DMP) works through a nonprofit credit counseling agency to repay your debt in full with a lower interest rate and one monthly payment.

• Debt relief may cut what you owe if you're deep in delinquency, while a debt management plan could fit better if your accounts are current and you can afford to make the payments.

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Paying the highest-interest debt firstSplitting payments evenly across all debtsClearing the smallest balance firstFocusing on the debt with the longest term

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Debt Relief vs. Debt Management: What's the Difference?

Both debt relief and debt management aim to get you out of debt, but they take different routes. Debt relief tries to reduce your balance so you pay less than what you owe. A debt management plan keeps your balance the same but can help by potentially lowering interest rates or waiving certain fees.

Debt relief usually runs through a for-profit company while a debt management plan runs through a nonprofit credit counseling agency. That difference can shape the cost, the credit impact and the risk.

What Is Debt Relief?

Debt relief is a broad term that can mean a lot of things, but it most often refers to debt settlement. It's where you or a hired company stop paying your creditors, save money in a separate account and try to negotiate a lump-sum payoff for less than the full amount owed.

Here's what to weigh before deciding on debt relief:

• Your credit takes a hit: Missed payments and settled accounts associated with debt relief programs can lower your credit score and stay on your report for years.

• Creditors can say no: No creditor has to accept a debt relief or debt settlement offer, and some won't work with debt relief companies at all.

• Fees can add up: Settlement companies charge a fee, often a share of the debt you enroll or settle.

• You may owe taxes: Forgiven debt could count as taxable income.

Note that the Federal Trade Commission (FTC) offers an important protection. A for-profit company that sells debt relief over the phone can't charge you a fee until it settles at least one of your debts and you've made a payment under that agreement.

What Is a Debt Management Plan?

A debt management plan is a structured repayment program run by a nonprofit credit counseling agency. You meet with a certified credit counselor, share your budget and debts and the agency reaches out to your creditors to negotiate lower interest rates and potentially waive fees. Once the plan is set, you make one fixed monthly payment to the agency. The agency then pays your creditors. Most debt management plans last three to five years.

A debt management plan covers unsecured debts like credit card balances, personal loans and medical bills. It doesn't cover secured debts like a car loan, mortgage or anything like student loans. Credit counseling agencies do charge a setup fee and a small monthly fee, so make sure to ask about a debt management plan's costs upfront.

There's a catch: You'll usually have to close the credit card accounts enrolled in the plan and agree not to take on new debt while the plan is in place.

How the Two Compare

Here's a side-by-side look at how debt relief compares to a debt management plan:

• Repayment amount: A debt management plan repays 100% of what you owe at lower interest. Debt settlement aims to reduce the total balance owed.

• Timeline: Most debt management plans last three to five years. Settlement usually takes two to four years but depends on creditor cooperation.

• Credit score impact: A debt management plan may cause a short-term dip but tends to recover as you make on-time payments. Settlement can drop your score by 100 points or more and stay on your report for up to seven years.

• Cost: Most debt management plans charge a one-time setup fee of about $30 to $75 and a monthly fee that often runs $25 to $75. For-profit debt relief companies often take 15% to 25% of the total debt enrolled.

• Tax impact: Forgiven debt of $600 or more from settlement may be reported to the Internal Revenue Service (IRS) as taxable income on Form 1099-C.

Which Option Is Right for You?

When deciding between debt relief or debt management, it can helpful to ask yourself a few questions:

• Are your accounts current? If you're keeping up but drowning in interest, a debt management plan can lower your rate and protect your credit.

• Are you deep in delinquency? If you've fallen behind and can't cover the payments, debt relief may reduce what you owe, even with the credit hit.

• Can you afford steady payments? A debt management plan needs a reliable monthly payment. Debt relief leans on a lump sum you save over time.

Debt consolidation and bankruptcy are other paths worth considering. A nonprofit credit counselor can review your finances and help you compare your options.

Where To Find a Debt Management Plan

The safest way to find a legitimate debt management plan is to start with one of the two main accreditation bodies for nonprofit credit counseling:

National Foundation for Credit Counseling (NFCC): The largest and longest-running nonprofit financial counseling network in the U.S., with member agencies serving all 50 states. The NFCC agency finder at nfcc.org connects you with a certified counselor in your area.

Financial Counseling Association of America (FCAA): A national association of nonprofit credit counseling agencies. The FCAA directory at fcaa.org lists vetted member agencies that offer debt management plans.

The Bottom Line

Debt relief and debt management both offer potential solutions for getting out of debt, but they fit different situations. If you can pay your debt in full with a little help, a debt management plan is the safer bet. If your debt has passed the point of repayment, debt relief or settlement might offer a way out. Just make sure to walk in with your eyes open and avoid any company making big promises upfront.

If you're looking for additional options, make sure to consider how debt management vs. debt settlement or debt management plan vs. debt consolidation compare.

FAQs

Will a debt management plan hurt my credit?

A debt management plan can cause a small short-term dip, mostly from closing the credit card accounts enrolled in the plan. Though consistent on-time payments through the plan can rebuild your score over time.

What types of debt can a debt management plan help with?

Debt management plans handle unsecured debt like credit cards, medical bills and some personal loans. Mortgages, car loans and federal student loans are usually not eligible.

How do I find a reputable credit counseling agency?

Look for agencies accredited by the NFCC or the FCAA. A free initial counseling session is a sign you're dealing with a legitimate nonprofit.

Key Terms

• Debt management plan (DMP): A structured repayment program through a nonprofit credit counseling agency that helps you pay off unsecured debts in full over three to five years at reduced interest rates.

• Debt settlement: The process of negotiating with creditors to pay less than the full balance owed, often through a for-profit company, usually after missing several payments.

• Credit counseling agency: A nonprofit organization that offers free or low-cost financial education, budgeting help and debt management plan setup.

• Telemarketing Sales Rule (TSR): A federal rule enforced by the FTC that bans for-profit debt relief telemarketers from charging fees before they actually settle a consumer's debt.

• Form 1099-C: An IRS form a creditor may issue when $600 or more of debt is forgiven, which the IRS may treat as taxable income to the borrower.

Summary generated by AI, verified by MoneyLion editors

Sources

• FTC Sends More Than $5 Million in Refunds to Consumers Harmed by Bogus Debt Relief Scheme

• CFPB - What is the difference between credit counseling and debt settlement, debt consolidation, or credit repair?

• National Foundation for Credit Counseling - Agency Finder

• Financial Counseling Association of America

• FTC - Debt Relief Services & the Telemarketing Sales Rule