Deciding Between Debt Management Program And Debt Settlement

So, your excessive holiday shopping sprees and delinquent credit card payments have resulted in debt spiraling out of your control to the extent that it has become so insurmountable and unmanageable that you are in need of relief.

Fearing bankruptcy, all too often the relief comes from weighting the pros and cons of a debt management program or debt settlement.

If you find yourself in this situation to choose either a debt management program or debt settlement, this article would either offer you clarity in your decision or awaken your curiosity to want to know more before making a final decision.

It is a good thing that more information is everywhere. In fact, a simple search on the internet would offer a plethora of resourceful reading that may further assist you in making the right decision.

To compare and contrast the two plans, first, let's start with debt management program. Debt management program, or debt management plan (DMP) as it is often referred, is offered by consumer credit counseling services (CCCS) and can be for free or a fee depending on the service agency enlisted.

Most popular DMPs were created as a response to the newly formed 2005 bankruptcy reform laws. Unlike debt settlement with one creditor or individual debt resolutions for specific debts, a DMP agency looks at your entire financial portfolio. Once a DMP is in place, all late fees and over-the-credit-limit charges will cease.

Upon a complete financial analysis, you may be required to close all credit card accounts and begin paying a more realistic monthly payment to the agency. This payment is then divided and distributed to the creditors as agreed in the newly formed settlement.

You should no longer be contacted by the creditors for purposes of collections. Although despite the provisions of the DMP replacing the provisions of the original agreement, the personal obligations to the creditors is intact. Most communications would go through the DMP agent.

It is important to understand that creditors are not under any such legal obligation to accept a proposed DMP and in fact, may refuse the terms of the agreement. Creditors also may elect to propose a counter-offer to those proposed by the agency.

Additionally, be advised that some debts such child support, alimony, tax debt, vehicle or home mortgage payments are not included in this management plan.

You may have seen debt settlement referred to as debt arbitration or debt negotiation, however these terms are interchangeable as the meanings are virtually the same.

In a nutshell, debt settlement is the process by which you, the debtor, and the lending agencies creditor agree to reduce the overall debt balance and this newly reduced balance would be regarded as the new account payable.

In fact, once satisfied, the reduced amount of the new account would be regarded as payment in full. These reductions can be negotiated by you directly or by an agent appointed by you, such as a lawyer or debt settlement company.

Why would a creditor agree to such an agreement? Well it's simple, the creditor can now trust that you would not file bankruptcy whereby they would receive no future payments toward the remaining debt. Or, the creditor is forced to file an expensive lawsuit that although the creditor is awarded a settlement amount, they may still find it difficult to collect from you.

As a result, many creditors are willing to negotiate and settle for lowering the amount owed. Although debt settlement may negatively affect your credit score, it may be worth it because many times it results in a 50% reduction of the overall debt. However, be cautioned that when considering this option, the terms of the new agreement must be strictly adhered to or in many cases the deal would be off!

So, if as a result of loans and other tremendous debt, you are seeking relief, consider carefully before deciding between debt management program or debt settlement plan.