Debt Settlement vs. Debt Management: Which Is Better?

Quick Answer

Both debt settlement and a debt management plan can provide you with some relief from debt. But both options carry some costs and risks, and it's important to know your situation and research all your options to determine the best debt repayment strategy.
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Paying off debt can be challenging in its own right. But if your credit is in poor shape and your budget is tight, it can feel like a futile endeavor. Debt settlement and debt management plans can provide you with some relief, but the two options—and their ramifications—are very different.

Here's how debt management and debt settlement work and what to consider before going down either path with your debt.

What Is Debt Management?

A debt management plan (DMP) is a structured repayment plan administered by a credit counseling agency.

A DMP works similarly to debt consolidation by combining all of your unsecured debt payments―usually credit cards—into one. Once the DMP is established, you'll make a single payment to the credit counseling agency, which will distribute the funds to your creditors.

The agency may also negotiate lower interest rates and monthly payments with your creditors, and the repayment plan typically lasts three to five years.

While basic credit counseling services are often free of charge, a DMP typically requires a modest setup fee and a monthly service charge. At nonprofit credit counseling agency Money Management International, for example, the average fees in 2022 were $33 upfront and $24 monthly.

Pros and Cons of Debt Management

Debt management can provide you with some payment relief and protect your credit score, but it can do short-term damage to your credit and impact your spending power. Here are some benefits and drawbacks to keep in mind when deciding if a debt management plan is right for you.


  • Doesn't cause lasting credit damage: While some aspects of a DMP can negatively impact your credit, it won't create yearslong damage like debt settlement or bankruptcy. In fact, a DMP can help you improve your credit score over time by helping you stay on top of making on-time payments.
  • Provides payment relief: With a reduced interest rate and lower monthly payment, you could save a lot of money and may have an easier time sticking to a repayment plan. Only having one monthly payment can also make the process simpler.
  • Has a set repayment term: Credit cards don't have structured repayment terms, which can make it more challenging to pay them off quickly. With the structure of a DMP, you'll have a better idea of when you'll be debt-free.


  • Can damage your credit in the short term: You'll likely be required to close your credit card accounts when including them in a DMP, which can cause your credit utilization rate to spike. This can cause your credit score to drop, though not as drastically as debt settlement or bankruptcy. The good news is that your credit score will recover as you pay down your balances.
  • No new credit: You typically can't open new credit accounts when you're on a DMP. If you've relied on credit cards and other forms of credit to get by, this can significantly impact your spending power.
  • May not be cheap: Agencies charge an upfront fee to set up a DMP and ongoing monthly fees, and depending on which agency you work with, you may end up paying more than you need to. Ensure you're working with a reputable nonprofit agency by searching for a credit counselor through the National Foundation for Credit Counseling or the Financial Counseling Association of America.

What Is Debt Settlement?

Debt settlement is a process that involves negotiating with a creditor to pay less than the full amount that you owe. You can settle a debt on your own or work with a debt settlement company or law firm.

If you work with a company or law firm, they'll typically encourage you to stop making debt payments while they negotiate terms with your creditors. Because a debt settlement typically requires a lump-sum payment instead of a restructured repayment plan, you'll typically need to deposit money into a dedicated account with the company or firm, which it will use for the settlement.

Borrowers may be able to settle for as little as 50% of what they owe, though you may save more or less depending on the creditor and details of your debt. Debt settlement companies typically charge between 15% and 25% of the total debt amount.

Pros and Cons of Debt Settlement

Debt settlement can be worth considering as an alternative to bankruptcy, especially if you're already behind on payments and much of the damage has already been done. However, the process can be expensive, and there are some significant risks to keep in mind.


  • Can provide relief in a dire situation: If you're overwhelmed and other debt repayment options, including debt consolidation and DMPs, aren't feasible, debt settlement could help you get out from under a significant financial burden.
  • Helps you avoid bankruptcy: While debt settlement can do more damage to your credit history than a DMP, it won't be as bad as bankruptcy.
  • Can prevent other consequences: If you can negotiate a settlement with your original creditor, you may be able to avoid having the debt sent to collections, which can compound your credit issues. Settling with a debt collection agency can also save you from a lawsuit, which could result in wage garnishment and other drastic measures.


  • Can be costly: If you hire a debt settlement company or law firm, you may have to pay a hefty fee for their service, reducing your savings. If you stop making payments during the negotiation process, the creditor may add late payment charges and collection fees to your balance, increasing how much you owe. Finally, if the creditor does forgive a portion of your debt, you may need to report the amount as income on your tax return, which could result in a tax bill.
  • Can devastate your credit: A debt settlement indicates that you didn't pay as originally agreed, and because your payment history is the most important factor in your FICO® Score , it can be devastating for your credit profile. A settlement will remain on your credit reports for seven years from the original delinquency, so if you're already behind on payments, much of the damage may have already been done. But if you're still paying on time, consider other options.
  • No guarantee it'll work: Because you have a contract with your lender, it has the right to refuse your attempt to settle. In fact, some creditors may have a policy against working with debt settlement companies and law firms. Even if you do get a creditor to come to the table, settling may not get you the savings you're hoping for.

Debt Management vs. Debt Settlement: Which Is Better?

Ultimately, the decision to get on a DMP or to settle for less than what you owe depends on your current situation, budget and options. Here's a quick recap of how the two processes differ:

Debt Management vs. Debt Settlement
Feature Debt Management Plan Debt Settlement
Repayment Provides a structured repayment plan over three to five years Typically involves a lump-sum payment
Relief A credit counseling agency can negotiate lower interest rates and monthly payments and combine multiple payments into one Satisfies your debt for less than what you owe
Costs Typically requires an initial setup fee of $30 to $50 and a monthly fee ranging from $20 to $75 Debt settlement companies may charge 15% to 25% of the debt amount; creditors may tack on late fees and collection charges if you stop making payments; forgiven debt may be subject to income taxes
Credit score impact Closing your credit cards can cause your utilization rate to spike, hurting your credit score until you pay off the debt Missing payments during the negotiation process can damage your credit score, as can the settlement itself; these items remain on your credit reports for seven years from the original delinquency
Other risks Creditors may cancel the DMP if you miss a payment or apply for other credit during the repayment period Creditors may not be willing to negotiate with you
When to consider it Your credit score needs some work, and you don't qualify for or can't afford debt consolidation You're already behind on payments, and neither debt consolidation nor a DMP is feasible

Carefully Consider Your Situation to Determine How to Tackle Your Debt

Before you consider a debt management plan or debt settlement, take stock of your situation and research your debt repayment options. If you have great credit and room in your budget, for instance, a balance transfer credit card or debt consolidation loan may be worth considering. You can also look into accelerated repayment strategies.

On the other end of the spectrum, bankruptcy may be your only option if your financial situation doesn't make anything else possible.

Check your credit score before you proceed to better understand your options. If you're overwhelmed, consider consulting with a credit counselor who can evaluate your situation and provide personalized advice, often free of charge.