Debt Management Plan vs Debt Settlement – Comparison
It can definitely be confusing to determine which route to take when trying to take care of your debt.
Different solutions work in different ways and not every solution will work for you based on your financial situation.
Today, I’ll be comparing debt management plans and debt settlement offers in order to help you figure out which one would be right for you.
What is a Debt Management Plan?
A debt management plan is an informal debt solution that you can opt for if you reside in the UK. It involves an informal agreement between you and your creditors which states that you will make reduced monthly payments towards your debt(s) until they are completely paid off.
Unlike other formal debt solutions available in the UK, debt management plans typically involve you paying off your debt in full. As a result of this, DMPs can often last much longer than other debt solutions such as IVAs or DROs.
Furthermore, DMPs only cover unsecured debts such as credit card debt, personal loans, student loans, etc. Priority and/or secured debts cannot be included within a DMP.
Some examples of priority debts include rent arrears, mortgage repayments, council tax debt, etc.
You can choose to set up a DMP on your own or get it set up through a DMP provider. I’d personally advise that you get it set up through a DMP provider as one of the main appeals of debt management plans is the fact that you don’t have to deal with creditors on your own.
Once your DMP is put in place, your contact with creditors becomes minimal. They can still contact you as the terms of your DMP are not legally binding but in most cases, your DMP provider will negotiate with them on your behalf.
Your creditors may freeze interest and charges on your debts but they are not obligated to do so.
What is a Debt Settlement Offer?
A debt settlement offer (also known as a full and final settlement offer) is another debt solution which involves you paying a single large lump-sum payment to your creditors in order to take care of your debt(s).
Debt settlement offers tend to be accepted if creditors feel that it’s not worth it to keep recovering money from you in the form of instalments.
The lump sum of money can be less than the amount of money you actually owe. You can expect your creditors to write the remaining debt off but this is something that might have to be negotiated. You can choose to do this yourself or hire a debt settlement company to do it for you.
You could get the lump sum unexpectedly such as in the form of inheritance or by winning a lottery. Other sources of money such as from compensation, the sale of a valuable asset or a pension can also be used.
The money you produce for the debt settlement offer is distributed evenly among all the debts that you have. If you don’t have the money to cover all of your debts equally, then you can choose to settle specific debts.
When you opt for a debt settlement offer, it gets logged in your credit file and has a negative impact on your credit score (just like all debt solutions).
The debt settlement offer appears as ‘partially settled’ in your credit file. This is to inform future lenders that the money that you owe was not repaid in full. The entry of the debt settlement offer stays in your credit report for six years after the date on which it was settled.
Opting for a Debt Settlement Offer with Multiple Creditors
If you’re opting for a debt settlement offer and have several different creditors, then you may find it confusing to distribute the lump sum payment among them.
You can choose to make one lump sum payment if all of your creditors agree.
This would involve you dividing the lump sum amount of money among your creditors based on how much you owe each creditor.
Debt Management Plan vs Debt Settlement Offer; Which one is Better?
People often ask me this and I always say the same thing to them: there’s no one debt solution that is better than the other. It just depends on the kind of financial situation that you’re in.
Of course, it can be quite tricky to assess your financial situation and determine which solution would be best for you.
You can do this yourself by doing your own research or you could seek advice from credit counseling agencies. A credit counseling agency would look at your financial situation and help you figure out which debt solution would be best for you.
If you’re choosing between a debt settlement offer and a debt management plan, the factors to look towards are quite obvious: the amount of money you have.
For example, If you’re drowning in credit card debt and are only able to get a small surplus amount of income at the end of each month, then maybe opting for a debt management plan would be the right choice. That small surplus income could take the form of your reduced monthly payment and help you pay off your credit card debt.
On the other hand, if you’re unable to secure a substantial surplus income every month but were able to get your hands on a large lump sum of money such as by inheriting it, then a debt settlement offer is definitely something you should be thinking about.
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“Debt management plan vs Debt Settlement Offer” seemed like such a silly idea for a post for me since they’re both equally useful in their own right.
However, this post gave me the opportunity to explore how diverse debt solutions can be and how you should opt for one by first assessing your own financial situation.