What is a Debt Settlement Plan?

If something has happened in your life that has pushed you to the edge of a financial abyss, you should be looking for ways to keep from being swallowed up in that gaping hole. If you’ve searched the Internet for information you have probably come across the terms “debt management plan” and “debt settlement plan.” What’s the difference? Many people start their search with a visit to a credit counseling service. In some cases, this can make a befuddled consumer even more confused, as there are both for profit companies and not for profit agencies offering a variety of debt repayment plans. Some offer both debt management plans and debt settlement plans, while others don’t. While both a management plan and a settlement plan involve consolidating your monthly payments on unsecured debt into a single payment made to the counseling agency or company, the key difference is how much of your total debt you’ll pay back. With a debt management plan, you’ll pay back all of your unsecured debt over time, usually no longer than 4 years. The credit counselor will determine a monthly amount you can afford and then contact your creditors to inform them you are in a plan and they will be paid back over time. Typically, this involves a reduction in the interest rate you’re paying and in some cases the elimination of any late fees you’ve accrued. If you owe more than you can realistically pay back within the time frame, debt management plans won’t work for you. With a debt settlement plan, the credit counselor attempts to get your creditors to agree to a repayment of less than the total amount you owe them. The amount negotiated can range from a 30% to 50% reduction. You will pay a monthly amount directly to the credit agency, which will then negotiate a settlement with your creditors, one by one. If this sounds too good to be true, in some ways, it is. First, a debt settlement plan offers no legal protection; so there is nothing to stop your creditors from continuing to harass you with collection calls or even to file a lawsuit to recover the debt. Second, the credit agencies charge a hefty fee for negotiating these settlements, which has the effect of making the actual reduction of your debt much less than it appears to be. The sad fact is that many people who enter into debt settlement agreements end up declaring bankruptcy at a later time. Before you get yourself into a debt settlement plan, talk to a licensed bankruptcy trustee. In Canada, there is something called a consumer proposal, which is essentially identical to a debt settlement plan, but it comes with legal protection. You can get a free initial consultation from a licensed bankruptcy trustee to find out if a consumer proposal is the right solution for you.