Debt resolution vs. debt management plan: Pros and cons

You want to get ahead financially. You want to save money and work on some of those big goals you've been dreaming of.

There's just one thing stopping you: debt. 

When you're in debt and can't seem to get out, it's easy to feel overwhelmed. Take a deep breath. We’re going to present a couple of options for you to consider.

Debt resolution is one possibility. A debt management plan is another. Knowing how they work can help you take the first steps toward getting your debt under control and improving your financial situation.

What is debt resolution?

Debt resolution is the process of negotiating with your creditors to accept less than you owe. 

Get rid of debt without paying in full? Can you really do that?

Yes, you can, and it's completely legal. 

When you resolve debt, you're asking your creditors to accept less than the full amount but consider it payment in full. For instance, if you have a $5,000 credit card balance, you might negotiate with your credit card company to pay $3,800 instead. If the creditor accepts the offer, then the other $1,200 in credit card debt is forgiven. You don't have to pay it back. 

Creditors may be willing to do this if you can show that you can’t afford to repay the debt.

You can resolve debt on your own if you're up to the task of negotiating with your creditors. If you’re not comfortable negotiating, you can hire a professional debt resolution company instead. 

Either way, resolving debt can significantly reduce what you owe and help you get rid of debt faster. That leaves you free to focus on other things to get your finances—and your life—on track. 

What is a debt management plan?

A debt management plan is a structured plan for paying off debt. It’s also known as a DMP and it works something like this:

• You work with a credit counselor to create a debt payoff plan.

• Typically, you’ll need to agree not to use credit while you’re in the plan. The credit accounts that you include in your plan will be closed.

• You make a monthly payment to your plan.

• Your counselor distributes the money to your creditors. 

• Once you've made all the monthly payments to the plan, your debts are paid off. 

Debt management plans don't reduce what you owe. If you're going into the plan with $10,000 in debt, then that's what you'll have to pay off. You may, however, be able to get your interest rates lowered while you're enrolled in the plan, and your creditors might be willing to waive certain fees.

Debt management plans aren’t easy, and your required monthly payment might be high. Also, if you miss a payment, you could face stiff consequences, including termination of your plan.

Pros and cons of debt management vs. debt resolution

It would be nice to have a perfect solution for erasing debt. But like anything else, debt management and debt resolution have their pros and cons. 

Why would someone choose debt resolution over a debt management plan or vice versa?

Debt management plan pros:

• Streamline monthly debt payments.

• Potentially save money on interest and fees.

• Let someone else manage your plan.

• Avoid collection actions by creditors who agree to participate.

• Get out of debt faster than by making minimum payments.

Debt resolution program pros

• Streamline monthly debt payments.

• Significantly reduce what you owe. 

• Let experts negotiate with your creditors for you

• Avoid collection actions by creditors who agree to participate. 

• Get out of debt faster than by making minimum payments.

• Free up cash flow since the monthly contribution may be lower than your minimum payments.

Here are the potential downsides to compare:

Debt management plan cons

• Usually requires you to close your credit accounts. Closing accounts can hurt your credit.

• Creditors don't have to agree to the plan and might still try to collect.

• If you miss a payment, your plan might be terminated.

Debt resolution program cons

• You typically need to be past due to resolve debts. Missing payments can hurt your credit.

• Creditors don't have to agree to the plan and might still try to collect.

• Unless you’re insolvent, you might owe taxes on the forgiven amounts.

How to choose between debt resolution vs a debt management plan

Is debt resolution better than a debt management plan, or vice versa? They can both help you to get rid of debt and improve your financial situation. Whether it makes sense to choose one over the other can depend on:

• How much debt you owe

• What kinds of debt you have (i.e., credit cards, personal loans, a car loan, etc.)

• Your overall financial goals

If you've got overwhelming debt, debt resolution could help you cut down on what you have to pay. On the other hand, if you want to pay off your debts in full but need help getting your finances organized, a debt management plan could be the guidance that helps you.

Some debts aren’t eligible for a debt resolution program or a debt management plan. For example, federal student loans. The Department of Education offers various options to help struggling borrowers, such as using a loan deferment or forbearance to pause payments. (Both let you skip payments, but in a deferment, you'll continue to be charged interest.) Except in rare cases, you can't get rid of student loans in bankruptcy. 

Because you might increase your cash flow or get rid of debts faster, enrolling in a debt resolution program could help you improve your financial situation so that you can handle your student loans.

Debt resolution program

You might prefer a debt resolution program if you…

• Intended to fully repay your debts but genuinely need some of it forgiven.

• Owe unsecured credit card and loan debts and your monthly payments are unaffordable or you’ve already fallen behind.

• Want to avoid filing for bankruptcy.

• Want expert negotiators to talk to your creditors for you.

Debt management plan

You might choose a debt management plan if you…

• Owe unsecured credit card and loan debts, and you're tired of trying to juggle multiple payments each month. 

• Have only been paying the minimums to your credit cards and want to start making more progress with each payment. 

• Are comfortable with closing your credit card accounts and committing to a plan to pay off your debts in full over the next few years.

How to get help with overwhelming debt

What do you do when your debt situation is just too much to handle? 

You could ignore it and hope it goes away, but that really doesn't work. Talking to a professional debt consultant or credit counselor is a better option when you don't know what else to do.

Debt consultants and credit counselors can look at all the specifics of your situation and help you decide which option might be best. Your professional can break down the pros and cons so you can choose a solution that'll help you get rid of debt on your own terms. 

Ready to resolve debt for good? Get a free debt evaluation from Achieve today.