Question: What’s the difference between a debt management plan and debt settlement?
Rachel H. from Austin, Texas
Rachel, thank you for the question. Debt management plans and debt settlement programs are both discussed as ways to address debt, but they operate in very different ways and carry different tradeoffs.
Understanding those differences can help you avoid confusion and choose an approach that aligns with your financial situation and comfort with risk.
What a Debt Management Plan Is
A debt management plan, often called a DMP, is a structured repayment program typically offered through nonprofit credit counseling agencies.
In a DMP, you work with a certified credit counselor to review your budget and debts. If the plan is appropriate, the agency works with participating creditors to request reduced interest rates or fees. You then make one monthly payment to the agency, which distributes the funds to your creditors.
When a debt management plan begins, enrolled credit card accounts are usually closed. Payments continue until the balances are paid in full, typically over three to five years, depending on the situation.
What Debt Settlement Is
Debt settlement is a different approach. It generally involves stopping payments to creditors and attempting to negotiate a payoff for less than the full balance owed.
In many cases, consumers work with a for-profit debt settlement company and make monthly payments into a separate account. The settlement company then tries to negotiate lump-sum settlements with creditors.
There is no guarantee that creditors will agree to settle, and the process often involves accounts becoming delinquent before negotiations occur.
A Key Difference to Keep in Mind
Debt management focuses on structured repayment over time, while debt settlement focuses on negotiating reduced payoffs after accounts fall behind. The difference is not just cost—it is how risk and credit impact are handled.
How Each Option Can Affect Credit
Debt management plans typically aim to keep accounts in good standing once the plan begins, though accounts are closed and credit reports may reflect participation in a plan. Credit impact varies by individual situation.
Debt settlement usually involves missed payments and charged-off accounts, which can significantly affect credit scores. Settled accounts may also be reported as paid for less than the full balance.
Fees and Oversight
Nonprofit credit counseling agencies offering debt management plans are subject to consumer protection standards and fee limits that vary by state.
Debt settlement companies often charge higher fees, and those fees are typically based on the amount of debt settled or the amount saved. Costs and practices can vary widely.
Which Option Is Right?
There is no single solution that works for everyone. A debt management plan may be a better fit for people who want structure, education, and a plan to repay balances in full over time.
Debt settlement may be considered by some consumers facing severe financial hardship, but it comes with greater uncertainty and potential consequences.
Getting Neutral Guidance
Before choosing either option, it can help to speak with a nonprofit credit counselor who can review your situation and explain the tradeoffs clearly.
Understanding how each approach works—and what it asks of you—can make the decision feel more manageable and informed.
