Staying Fit
Getting professional help to manage your debt isn't always easy.
See also: Find extra money to pay off debt.
For starters, federal authorities and consumer advocates often warn people in debt about scam debt relief agencies that promise assistance, but do nothing more than take your money. Even if you manage to avoid the con artists, how do you know the differences between debt management programs and debt settlement firms? And what should you expect if you choose to utilize either of these options?
Here is some guidance on the differences between debt management agencies and debt settlement companies, along with the pros and cons of using each.
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Services Offered
Debt management firms and debt settlement companies both generally offer to help you eliminate unwanted or unmanageable debt, such as credit card bills and medical expenses. To reduce your debt, both types of agencies will negotiate with your creditors to do any of the following:
Services Offered
Debt management firms and debt settlement companies both generally offer to help you eliminate unwanted or unmanageable debt, such as credit card bills and medical expenses. To reduce your debt, both types of agencies will negotiate with your creditors to do any of the following:
- Lower your payments
- Reduce outstanding balances
- Get late fees or penalty charges eliminated
One difference in services offered is that debt management firms often double as credit counseling agencies. That means debt management firms offer financial education services, such as teaching you about budgeting, cash management, and the proper use of credit and debt.
How They Work
Debt management companies and debt settlement firms operate in completely different ways. That's because debt management agencies actually came into existence as a creation of banks and other creditors.
Back in the 1980s, banks needed to come up with a way to reduce their losses when consumers didn't repay debts or when people filed for bankruptcy protection. The banks' solution was to create a third-party system — debt management agencies — that would work with consumers to get them to repay some, if not all, of their debts.
Consequently, most debt management firms today focus primarily on reducing your interest rates and late charges to make your debt repayments more affordable. Many debt management agencies have deals with credit card companies to knock your rates down to a pre-set level. For example, your Citibank Visa card may have an 18 percent rate. But if you enroll in a debt management program, your interest rate can be lowered into the single digits or even to zero.
With debt settlement firms, no such deals exist. Debt settlement firms require you to stop paying your bills for a period of about six months. After that, the debt settlement firm approaches your creditors to begin settlement negotiations.
Debt settlement firms operate on the premise that, after your creditors have not been paid for many months, they'll be more likely to settle your debts — perhaps for pennies on the dollar — in order to get some money, as opposed to taking a total loss.
Credit Consequences
If you use a debt management firm, they often require you to close your credit cards and agree to a single, consolidated payment in order to pay off your debts.
