What is the difference between a debt settlement and a debt management plan? Here are the key differences to know

Getting out of debt can be a difficult process. While debt consolidation can help those wanting to pay off credit card debt or other types of debt, sometimes you need professional help. Two popular options are debt settlement companies and debt management services, but they each offer very different paths to solvency.

Here's what you need to know about the differences between debt settlement and debt management, and how to tell which option is right for you.  

• Debt settlement can reduce what you owe, but comes with risk
• Debt management plans can help you fully pay off your debt 
• Bottom line

The promise of debt settlement companies, also called debt relief companies, is that they can negotiate with your creditors so you can ultimately pay less than what you owe and get out of debt quickly. These for-profit companies charge a fee for this service, generally between 15% and 25% of the total amount of unsecured debt (debt that's not backed by an asset like a car or house) enrolled in the program. However, this method can come with serious consequences.

That's because most debt settlement companies tell clients to stop paying their creditors and instead save funds in an account that the company has set up. Once you've saved enough, the company uses that money to negotiate a settlement with your creditor.

But in the meantime, your creditors are likely still reporting your late payments to the credit bureaus, lowering your credit score, and the late fees and interest continue to pile on. In some cases, your creditors could sue you and add a whole new set of expenses for you to deal with.

To top it off, there's no guarantee that your creditors and the debt settlement company will reach an agreement on lowering your payments. While you won't have to pay the settlement company's service fee if this happens, you'll still be saddled with those interest charges, late fees, and possible legal fees. That's why the Consumer Financial Protection Bureau (CFPB) warns debt settlement could leave you deeper in debt than you were to begin with.

That said, if you fully understand the risks of using a debt settlement company and still want to proceed, do yourself a favor and work with a reputable partner. CNBC Select has ranked New Era Debt Solutions and National Debt Relief as two of our top picks based on cost, customer ratings, company history and more. 

Debt management plans are created by credit counseling agencies, which are generally non-profit organizations. Credit counselors work with you to create a debt management plan that can lower your monthly payments and interest fees. From there, you'll generally make one payment to the organization, which will make monthly payments on your debts on your behalf. The goal is to pay off your debts in three to five years.  

Unlike debt settlement, a debt management plan has you pay off what you borrowed in full. That means you'll avoid some of the negative effects debt settlement can have on your credit, which in turn makes it easier for you to get a credit card or loan in the future.

Credit counseling agencies tend to cost less money than debt settlement companies, and sometimes they're even free of charge. Prices can vary by state — in California, for example, monthly fees for a debt management plan are limited to the lesser of 8% of the amount paid to creditors monthly or $35, plus an education and counseling fee of $50.  

If you're considering using a credit counselor, there are several ways to find one, including:  

• Financial Counseling Association of America 
• National Foundation for Credit Counseling 
• Local credit unions  
• Local universities and cooperative extension offices 

A reputable credit counselor will be able to send you free information on their services and will be willing to put their fees and prices in writing. You can also check with your state attorney general's office or a state consumer protection agency to confirm a credit counselor's reputation.  

If you're looking to get out of debt, you have options. Debt settlement can help you pay less than you owe while debt management plans can help you pay off debt in several years. They also tend to vary in cost — while a debt management plan can cost a small or no fee, debt settlement tends to cost 15% or more of the debt you enroll in the program.  

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