WHAT IS THE DIFFERENCE BETWEEN A DEBT MANAGEMENT PLAN AND A DEBT SETTLEMENT PLAN?
This is a question that arises fairly frequently when our firm discusses non-bankruptcy alternatives with prospective clients. The proliferation of television, radio and internet ads regarding these services inevitably causes confusion about the types of services, and what they are designed to accomplish. Keep in mind that neither type of plan will assist a consumer with secured debts or certain unsecured debts, such as taxes, student loans or child support.
A debt management plan (often called a “DMP”) involves a consumer soliciting the services of a third-party – usually a credit counseling agency – to contact their creditors and negotiate reduced terms on their debts. The credit counseling agency negotiates with the creditors on the client’s behalf, and seeks reductions in interest rates, monthly payments and other contract terms which will make repayment of the debts more affordable for the consumer. The consumer makes one monthly payment to the credit counseling agency, and then the agency distributes the money among the participating creditors based upon the negotiated terms. Usually the agency will charge a nominal monthly fee for the service.
In our experience, a debt management plan is usually only successful if the total amount of debt owed is no more than 50% of a consumer’s annual income. In addition, the more creditors that are involved, the less likely it is that the plan will be successful. Participation by the creditors in such a plan is voluntary, and there is no guarantee that a particular creditor will cooperate with the plan for the entire duration. But if a consumer has only a small amount of creditors, with a manageable total amount of debt, a debt management plan is usually the best alternative to bankruptcy.[i]
A debt settlement plan usually involves the employment of a debt settlement company, which also has an affiliated law firm. While the debt settlement plan usually involves making a monthly payment to the debt settlement company, the money is not immediately paid to the creditors. Instead, the debt settlement company will accumulate the money, and then attempt to settle with the creditors one at a time, by convincing them to accept a lump-sum payment in exchange for the elimination of a portion of the remaining balance.[ii] Unfortunately, debt settlement plans are rarely successful. Most credit card companies are not going to wait for a year or more to receive a portion of their outstanding balance. In our experience, the more likely result is that an impatient creditor will file a lawsuit (link), and the consumer will be left to defend it on their own. Eventually, the lawsuit may go to judgment, and a garnishment (link) will ensue. Any money paid in to the debt settlement plan may be lost to upfront attorney’s fees and other charges.
Most local bankruptcy firms offer a free consultation, so any consumer considering a debt management plan would be wise to find out what their options would be in a bankruptcy case. But few, if any, local attorneys would recommend a debt settlement company that promises to settle your debts for “pennies on the dollar”, and instead leaves you with lawsuits, garnishments and ruined credit.
[i] The only credit counseling agency that our office is willing to recommend is Consumer Credit Counseling of Middle Georgia. Unlike companies that are exclusively on the internet, CCCS offers a local office where consumers may meet with certified counselors in person.
[ii] For instance, the debt settlement company will offer a credit card company a lump-sum payment of $2000 on a balance of $3000. If accepted, the credit card company agrees to satisfy the remaining debt.