Debt Settlement vs. Debt Management
Credit has become a way of life for Americans. We depend upon it to buy our homes, cars, education and whatever else we want. Today, the average American carries $104,215 across mortgage loans, home equity lines of credit, auto loans, credit cards, student loans, and personal loans. 1
It is so much easier to get into debt than out of debt. Once in debt, the worst thing you can do is ignore it. Fortunately, and unfortunately, there are a lot of options available to help you get out of the debt – including credit card debt.
Some options to get out of debt sound too good to be true—they are. While the idea of paying off your debt for less than what you owe is tempting, it is by no means a clean slate.
Debt Settlement
A debt settlement company will try to negotiate with your creditors to accept a lump sum payment that is less than your current balance. You will be tasked with making regular monthly deposits into an account which will go towards that lump sum payment. During this time, your creditors are not getting paid, and your credit score is dropping. Once enough money accumulates in your account, your creditor may agree to take the lump sum, but the story is far from over.
Usually, a statement will appear on your credit report noting that you paid less than what was owed, which will negatively impact your credit. Uncle Sam may consider the forgiven debt as taxable income, and the debt settlement company will collect a fee from you, usually 15-25% of your settled debt. Keep in mind that if you want to settle your debts, you can negotiate with your creditors on your own.
Debt Management
The goal of a Debt Management Plan is to pay off your debt in full. Creditors will agree to reduce interest, waive fees, and may re-age your account after a specified number of payments. In addition, creditors will typically reduce minimum monthly payments. The plan must be structured to have the debt paid in full within 60 months, by law.
Once enrolled in a plan, regular monthly deposits of a set amount are made to your debt management agency. The agency will then distribute your funds to your creditors until the debt is paid in full. Although there may be fees involved, they are usually more reasonable than a debt settlement company. Debt management agencies are non-profit organizations and fees are regulated by state. They also offer debt counseling services.
Next Steps
Before choosing a debt management agency, do your homework. These agencies can vary greatly as far as their policies and capabilities. Be sure to check out their accreditations.
People have depended upon GreenPath Financial Wellness for over 60 years to overcome their financial challenges and achieve financial wellness. GreenPath proudly partners with nearly 600 financial institutions across the country. Through these partnerships, they can arrange lower interest rates and monthly payments. Translation? You save money and pay off debt faster. Learn more about GreenPath’s Debt Management Plan and calculate how much you could save.
End Collection Calls
Once creditors agree to GreenPath’s Debt Management Program, collection calls drop and so do your balances. You are officially on the path toward financial wellness!
NE PA Credit Union members can receive free financial education and counseling services through GreenPath Financial Wellness, a nonprofit organization. A financial counselor will help you create a budget, review your credit report, and discuss debt repayment options. Get started at www.greenpath.com/nepa or call 877-337-3399. The call is free and confidential.
1) Jennifer Streaks, Business Insider (July 17, 2024), Average American Debt in 2024: Household Debt Statistics, Retrieved July 19, 2024 from www.businessinsider.com
