The Key Differences Between Debt Consolidation and Debt Management

There are millions of Americans suffering from debt which they seem never able to fully pay off. According to numerous published statistics, the average American has between $8,000 and $10,000 in credit card debt. That number may not seem like very much, but when that stat is viewed in light of a stagnant economy, and millions of people suffering from unemployment and underemployment, it is easy to see how such debt can feel overwhelming and never ending. Over the years numerous financial products have been developed to help those who are in debt. Two of the most popular of these programs are debt consolidation and debt management. There is often much confusion relating to these two debt repayment methods. Here we will take a look at both and clear up any confusion.

Debt Management is a Full Repayment Agreement

Debt management plans (DMP) are full repayment plans which must be approved by the lender that will participate in the plan. For example, if you use ABC Debt Management Company to help you repay your credit cards, and one of those cards is American Express, AmEx will have to agree to the debt management plan. Your debt management company will arrange a payment plan with AmEx – a plan which will see you repay every cent you owe. Though most credit card issuers continue to charge interest, it is usually reduced once you enter the plan.

Debt Consolidation is NOT a Full Repayment Agreement

Debt consolidation plans (DCP) do not repay the full original balance. Instead, DCPs use the principle of debt negotiation in order to save you money, and specifically avoid a full repayment of your original debt. The principle of debt negation works like this: When the credit card issuer has not received a payment on the debt for several months, many of them will become more open to negotiating a “settlement.” If you owed your credit card company $5000, but didn’t pay the minimum for 6 months, the company may be willing to take $3500 as payment in full; they would rather get something than nothing. The other $1,500 you owed plus any interest, penalties, and fees, would be “written off” (taken as a loss) by the bank.

Debt Management Costs More

Because you make a full repayment with debt management, and are usually charged interest, your monthly payment with a debt management plan will always be higher than putting the same accounts on a debt settlement plan.

Both Plans can Affect Your Credit – But It Depends on Your Individual Situation

In order for lenders to agree to take a negotiated settlement, as in the debt consolidation process, your accounts must usually be severely delinquent. This means that most people who enroll in a debt consolidation program will show late payments on their credit. But that does not mean that the program itself affects your credit. For example, if you enroll on a debt consolidation program after already having fallen behind, the program may not have any effect on your credit.

Debt management programs are usually denoted on the enrollee’s credit. Whether or not this affects your credit has a lot to do with the current state of your credit when you enroll, just like with the debt consolidation.  In a nutshell, credit is a very complex topic. Either plan may have some or no effect on your credit, depending on your individual situation.

Essentials