We break down over 15 criteria to show you the differences between DMPs, Debt Settlement and Debt Consolidation so you can make the right decision for you.
What is the difference between Debt Management Plans, Debt Settlement, and Debt Consolidation?
There is a lot of confusion out there between Debt Management Plans (DMPs), Debt Settlement, and Debt Consolidation. All these things sound similar, but they are dramatically different solutions to your debt problem. In this video, I am going to do a comprehensive side-by-side comparison of each of these options, so you can decide which–if any–of them could help you solve your debt problem.
We’ve spent years in the lending industry and understand how the companies work as well as the personal finance implications of various debt solutions. We track dozens of lenders, debt settlement companies, and credit counseling organizations. We’ll use that experience to break down these options.
First, let’s briefly explain each option.
Debt management plans (or DMPs)
In debt management plans, a credit counselor will work with your creditors to drastically reduce the interest you pay in exchange for consistent, reliable payments and closing the accounts. You make a reduced payment directly to the DMP organization and they pay your creditors. Most DMPs are drafted to get you out of debt within 5 years.
Debt Settlement
In debt settlement, you work with a company to strategically default on your debts while making payments into a separate account. The company then negotiates with your creditors to reduce the principal you pay in exchange for lump sum payoffs from the account you had been building up.
Deb Consolidation
When you consolidate your debts, you take out a new loan with a lower interest rate and pay off other debts. You trade credit card minimum payments for consistent loan payments that will have a definite pay off date.
Many people throw around another term, “Debt Relief.” It isn’t a specific program and can often get confused with debt management or debt settlement. Since it isn’t a term with a precise meaning, you need to make sure you understand what people mean when they use it.
Now we’ll do a side-by-side comparison of the DMPs, Debt Settlement, and Debt Consolidation.
With both DMPs and Debt Consolidation, your debts are paid in full. In debt settlement, you actually pay a reduced principal amount. DMPs do not have a minimum debt amount needed to enroll. However, if you have low debt levels, a credit counselor might work with you on a different strategy to pay the debt off. Debt settlement companies require you to enroll a minimum loan amount. I’ve seen amounts as low as $7,500 and as high as $10,000. Debt consolidation loans are only limited by the minimum loan amount offered by the company. I have seen minimums between $1,000 and $5,000.
Will each of these options resolve all of your debt? In short, no. DMPs and debt settlement will only work with unsecured debt. And there is no guarantee that these options can resolve all of your unsecured debt. Some companies will not work with DMPs and there are companies that refuse to negotiate with debt settlement companies. **Technically, debt consolidation loan proceeds can be used for whatever you want, but in reality it is only a reasonable solution for unsecured debt with higher interest rates.
There are no credit score requirements to use a debt management plan or debt settlement. Debt consolidation only really works if you can get a loan that is at least 2 to 3 percentage points lower than the interest rates on your other debt. In order to be approved, you probably need a Fair credit score or better.
How will each program affect your credit score? This is, of course, a complicated question. But there are generally simple answers. The debt settlement process will absolutely put severe downward pressure on your credit score. Given the fact that you will default on your debts, your score will likely end up in the 400s before the program ends. If you stick with your DMP, you will make consistent on-time payments which is the single most important factor in building a strong credit score. However, the DMP will require that you close your credit cards. This could decrease your average age of credit. Debt consolidation could be very positive, but only if you are always on time with your payments. Debt consolidation can also help your credit score if it significantly decreases your utilization rate.
How do these options show up on your credit report? DMPs *could* show up as a notation on the affected tradelines, but that depends on the creditor. And that notation is not a formal designation, so it doesn’t impact your credit score. Although, future lenders would be able to see it. Debt settlement will cause all of your enrolled debt to be reported 30-days late, 60-days late, 90-days late, and ultimately in default. When you finally negotiate and pay off the debt, it will show up on your credit report as “paid in full for less than the full balance.” Debt consolidation will simply show up as a new trade line, or another loan.
How will each of these programs affect how you manage your finances? Both DMPs and debt settlement will eliminate your ability to use your credit cards. DMPs require that you close your credit card accounts as a stipulation to the agreement. In debt settlement, you burn bridges with your credit card companies when you stop paying them. Debt consolidation does not require you to get rid of your credit cards, but if you got into debt because you struggled to control your spending, you may choose to close those accounts.
So, how does each of these methods help you save money? When you enter into a DMP, your creditors agree to drastically reduce your interest rate. So, you spend less of your monthly payment on interest. Debt settlement is all about pressuring your creditors to accept less principal to settle the debt. Debt consolidation is all about paying a lower interest rate for less time.
I guess the real question is how much can you save. In general, DMPs will allow you to decrease your monthly payment by 20-35%. For people who complete the debt settlement program, the average saved is between 25-30% of the initial principal amount, after fees and taxes. When done right, debt consolidation can save you between 30-45% of the total interest expense.
Those numbers are great and everything, but which one allows you to save the most? Debt settlement will help you save the most, but it will trash your credit score for years and burn your relationship with your creditors. That will cut you off from the ability to access credit in the future. Debt management plans will save you the next most, but you will have to close your existing credit accounts and credit cards. Debt consolidation saves you the last overall, but you will be able to maintain all your credit accounts and preserve your credit.
How quickly can you get out of debt with each program? Credit counselors generally try to structure DMPs in such a way to get you out of debt within 5 years, even if you have considerable debt. Debt settlement is a chaotic process that usually takes 3 to 5 years, it goes faster if you commit more money to the program. It goes slower if your debt settlement company isn’t aggressive or your creditors refuse to negotiate. Debt consolidation is absolutely locked into the length of the loan you get. Unless you need a huge loan, I would recommend taking loan terms of 5 years or less. But ultimately, you want to take the shortest loan term you can afford.
Do any of these options offer additional financial counseling support? Because DMPs are managed in non-profit organizations, they often provide additional financial guidance. Debt settlement companies call their initial conversation a consultation, but this isn’t real counseling. It is mainly about debt settlement, selling you on the process, and getting you to sign up. Debt consolidation companies do not offer financial counseling.
How much do each of these options cost? DMPs are cheap because they are managed by non-profit organizations. You have a one-time setup fee of about $40 and then a monthly fee. That monthly fee could be something like $7 per account. Debt settlement companies charge you 15-25% of the enrolled debt, regardless of how much the principal is reduced. There is also usually an account maintenance fee of around $10 per month. The cost of debt consolidation is the interest you pay on the loan.
What kind of companies do each of these things? DMPs are usually done by non-profit organizations. The biggest of which are Money Management International and Greenpath, but of course there are many of them and some are small, local organization in your community. There are a lot of debt settlement companies out there. Many of them are not terribly transparent. The biggest companies include Freedom Debt Relief, Beyond Finance, JG Wentworth, and Pacific Debt Relief. Debt consolidation is provided by online lenders, banks, and credit unions.
The ultimate question is which of these strategies would be best for you? It is essential that you look into all the options and how they would impact your particular situation as well as your long-term goals. If you want to explore DMPs, we recommend going to the National Foundation for Credit Counseling (nfcc.org) to find a certified financial counselor. If you are interested in exploring debt consolidation loans or debt settlement, visit our marketplace pages at The Yukon Project. We partner with dozens of lenders. You can apply to any one of our featured lenders and we will check your rate with up to 40 other lenders. Our partners use a soft credit check, so applying won’t hurt your credit score. We will show you all of your approved offers so you can make an informed decision. Our partners can also talk to you about debt settlement.
If you have any experience with DMPs, debt settlement, or debt consolidation, leave a comment below. We are trying to build a community of people who can share their experiences so we can all be better informed when making decisions about our finances. If you found this information helpful, please like this video and subscribe to our channel. Your support helps us out and we really appreciate it.
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