Debt Consolidation, Debt Settlement or Debt Management?

Since most of you are not economists, you might get puzzled when it comes to the definitions of debt consolidation, debt settlement and debt management. Thought they seem very similar with one another, they are totally different in concept. You can’t grasp the right meaning from the superficial aspect. Instead, you should have an in-depth overview. To find a solution to your debt problem, it is important for you to differentiate their definitions from one another.

Debt management

Debt management is an agreement between the lender and the borrower. It is also known as debt management plan(DMP). The agreement addresses the term of an outstanding plan. In a DMP agreement, you should create a plan to pay your debt off. You can hire a professional from a management company to design a payment plan for you. Of course, it costs you some money. Or you can make the plan yourself. While making your plan, focus on the due dates and the minimum payments. A good plan helps to reduce outstanding, unsecured debts over time so that you can regain control of your finances.

Debt consolidation

When you are in the trouble of paying off several debts at the same time, debt consolidation is a good way to get you out. By applying for a debt consolidation loan, you can mix your debts into a single piece payment. Therefore, you do not have to keep various payment dates in your mind. Remembering the only one due date is enough. Besides, usually you get a lower interest rate and a more favorable term in debt consolidation. Thus it reduces your monthly obligation, and relieves you from the overwhelming pressure coming from all kinds of bills. For example, a credit card company allows you to transfer your debts and bills on other cards to the new one, asking for low interest or even no interest at all.

Debt settlement

Debt settlement is neither debt management nor debt consolidation. We regard it as the last resort in debt repayment. It is the negotiation that a debtor turns to when the total amount of debt is beyond his financial solvency. In a debt settlement, the two parties of the loan agree on a reduced amount of money that will be considered as pay in full. In other word, the lender forgives a percentage of the total balance. In a really severe situation, you have to declare bankruptcy to settle your debts. It is an irreversible option, so don’t do it unless it is inevitable.