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Debt Management vs. Debt Settlement: Which Is Best for You?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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In 2018, the average American held $38,000 in debt (excluding mortgages). The sobering truth is that some of these people will never get out of debt — in fact, 13% of respondents in the study said they believe they will be in debt for the rest of their lives. Perhaps you’re in significant debt that’s been mounting for years and you’ve decided it’s finally time to tackle it. You’ve heard about both debt management and debt settlement, but don’t really know what either entails.

Below, we’ve broken down the difference between debt settlement and debt management so you can decide which method is right for you.

Debt management vs. debt settlement

 Debt managementDebt settlement
What is it?A nonprofit credit counseling agency communicates with your creditors and helps you come up with a debt repayment plan.A for-profit company attempts to lower your total debt by negotiating your debts with your creditors on your behalf.
How much does it cost?On average, between $25-$50 per month. (There could be a small enrollment fee, but this should be less than $75.)18% to 25% of the total enrolled debt, plus potential other enrollment and account maintenance fees.
When is it useful?
  • If you want to learn about healthy money habits while repaying your debt.

  • If you want to maintain or potentially improve your credit score while paying off your debt.

  • If you find the simplicity of one monthly payment appealing.

  • If you have significant debt, which likely means $7,500 or more.

  • If you feel you’ve reached the point of no return, but don’t qualify for bankruptcy or don’t want to pursue bankruptcy.

  • If you want to get out of debt as quickly as possible and aren’t deterred by the negative impact this process can have on your credit.

Are there credit requirements?No.No.
How long does it take?It varies, but typically between 3 to 5 years.It varies, but typically between 3+ years.
Are there tax implications?No.Yes. You might have to pay taxes on your forgiven debt.
Will it affect your credit?It could. Enrolling in a program itself does not affect your credit. But if you close credit cards as part of the plan, that could affect your credit. However, consistently making monthly payments will likely improve your credit score.Yes. If you enroll in a debt settlement program, your credit score will likely take a major, lasting hit.
Is it guaranteed to work?If you stay on track with your monthly payments, it will work.No. There is no guarantee that a debt settlement company will be able to negotiate your debts.

What is debt management?

Debt management involves working with a nonprofit credit counseling agency to pay off your debt over the course of a specific time frame — typically three to five years. The process is fairly simple: Once you enroll in a program, you make one monthly payment to your agency, which then gets distributed to your various creditors.

Below, we’ve broken down everything you need to know about debt management so you can decide if it’s the right option for you.

How does it work?

A debt management program helps a consumer manage his or her unsecured debt. You simply make one monthly payment to the agency, and they disperse that payment to your various creditors, according to Katie Ross, Education, Development & Housing Manager at American Consumer Credit Counseling. Typically, credit counseling agencies can negotiate to get lower interest rates on one’s debts.

“The benefit of being in a debt management plan is that agencies like ours help people get back on financial track,” said Ross. “We can help them better their credit card debt by working with their creditors to reduce their interest rate and their payoff time.”

Credit counseling agencies typically offer financial education with their programs, which can help consumers avoid getting into debt again. “You’re getting ongoing counseling and you’re getting financial education to learn how to manage your money and stay on track,” Ross added.

Who is it useful for?

Debt management is typically a good decision for consumers who are ready to tackle their debt but don’t want to take on something as serious as debt settlement or bankruptcy.

Those who meet the following criteria might benefit from debt management:

  • People who don’t want their credit score to suffer. If you have a decent credit score and you’d like to maintain it, you might want to consider debt management instead of debt settlement. Although closing credit cards as part of the program could impact your credit score, enrolling in a program itself has no impact, Ross said. Plus, maintaining your monthly payments will likely increase your score. In addition, many credit counseling agencies have agreements with credit card issuers that if a consumer is enrolled in a debt management program and sticks to it, they will not report negative information to the credit bureaus.
  • People who won’t need any additional credit during this time. If you’re enrolled in a debt management program, you will likely not be able to open any new lines of credit. Ross adds that when someone enrolls in a debt management program, most creditors will typically put a notification that says “CC” on the consumer’s credit card. This tells any lender who might be looking to extend that person credit that they’re working with a credit counseling agency.
  • People who want to learn about sustainable money habits. Debt management is particularly useful for people who want to learn about how they can improve their financial habits and avoid getting into debt again. Most programs come with financial education that can help you stay on track. “For most non-profit credit counseling agencies … a big part of the mission is to educate,” Ross noted. “So we provide lots of different resources — budgeting guides, spending plan information, ongoing phone support and counseling.”

How much does it cost?

The monthly fees associated with a debt management program are typically low. Ross said monthly fees are driven by state regulations (some have licensing requirements and some don’t) and therefore they vary.

Regardless of the state you live in, the fees should be minimal. “Make sure that the fees are reasonable and they’re not exorbitant, and there’s no hidden fees anywhere,” Ross said.

In addition, Ross said many credit counseling agencies will be willing to work with consumers who cannot afford enrollment fees. “If there’s a financial hardship, the agency needs to be willing to waive the fee or reduce a fee,” she said.

ServiceCost
EnrollmentThis fee should not be more than $75.
Monthly maintenanceThis fee is typically between $25 and $50 per month, and should not exceed $50.

How long does it last?

Typically, a debt management program lasts from three to five years, according to Ross.

When should you use it?

There are a handful of scenarios in which pursuing a debt management program makes sense. If the following statements apply to you, you might want to consider it.

  • You’re ready for change. If you’re ready to finally improve your financial habits, debt management could be for you. The educational resources provided can help you make meaningful changes to help you avoid getting into debt again.
  • You’re looking to pay off debt without damaging your credit. Things like bankruptcy and debt settlement will damage your credit for years. But with debt management, you have the chance to maintain or even improve your credit score while repaying your debt.
  • You want a streamlined strategy for paying off your debt. Debt management involves just one monthly payment, making the process simple and straightforward.

What to watch out for

If you’re interested in enrolling in a debt management program, Ross advises checking for the following things when looking for a credit counseling agency to work with:

  • Nonprofit status. Make sure the organization you’re working with is a nonprofit.
  • Time in business. Check to make sure the company has been in business for at least seven to 10 years.
  • Membership status. Ross advises checking to see if the agency is part of a credit counseling association, such as the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCCA).
  • Third-party accreditation. Make sure the agency is accredited by a third party.
  • Complaints. Check with the Better Business Bureau (BBB) to make sure there are no complaints against the business.
  • Other requirements. Ross said you should also check to make sure the agency is licensed or bonded where they need to be.
  • Fees. As noted above, debt management plan fees should be reasonable and shouldn’t exceed $75 for enrollment and $50 per month.

What is debt settlement?

Debt settlement involves working with a for-profit company to have your debts negotiated. The idea is that by working with a debt settlement company, your debts will be negotiated to a lower amount and you’ll have less to pay.

Unfortunately, the debt settlement industry is rife with scams, and there’s no guarantee any of your debts will be settled. If you pursue this route, it’s imperative to do your due diligence. Read on for everything you need to know about debt settlement.

How does it work?

Consumers partner with a debt settlement company — sometimes referred to as a debt relief firm — who will attempt to negotiate the consumer’s unsecured debts to a lower amount. Each month, the consumer puts money in an account that is designed to pay off this negotiated amount once it is reached.

There is no guarantee that your debts will be negotiated, but if they are, it could be by as much as 50%.

You will likely need a minimum amount of debt to enroll in a debt settlement program. It depends on the firm, but minimum requirements are typically between $7,500 and $10,000.

Who is it useful for?

Debt settlement could be right for you if you have significant debt and you don’t anticipate being able to pay this debt off within a few years. It should be thought of as a last resort.

Those who meet any of the following criteria could consider debt settlement:

  • People whose debt is too significant for debt management. Typically speaking, debt management is a much better method for paying off debt. But if your debt is too significant for debt management and bankruptcy isn’t an option, you could consider debt settlement.
  • People whose primary concern isn’t their credit score. Debt settlement will have a major impact on your credit score, because you stop making your minimum monthly payments as part of the program. If your credit score is already poor and you think the benefit of getting out of debt outweighs the potential damage to your credit score, you could consider settlement.

How much does it cost?

Upfront costs vary with debt settlement. Some firms have no upfront costs at all. The primary form of payment is in program participation fees, as the firm will take a percentage of the total debt you’ve enrolled in the program.

ServiceCost
Program participation fees18% to 25% of total enrolled debt.
Miscellaneous feesFirms could charge additional maintenance and setup fees.

How long does it last?

It varies, but typically debt settlement lasts for three years or longer. It depends on the total amount of debt enrolled in the program and how long the negotiation process takes. Some programs will advertise that it could take as little as six months, though this is not typically the case.

When should you use it?

Considering debt settlement? If any of the following statements applies to you, it could be worth considering.

  • You have significant debt and not enough funds to pay it off. If you hold substantial debt (meaning upwards of $7,500) and don’t have the means to pay that debt off in a few years, debt settlement could be for you.
  • Bankruptcy isn’t an option. If you don’t qualify for bankruptcy or don’t want to pursue bankruptcy yet you hold substantial debt, settlement could be worth considering.
  • You want to get out of debt as quickly as possible even if it means your credit score will take a hit. Debt settlement will have a lasting negative impact on your credit score. If your desire to pay off your debt outweighs the potential ramifications to your credit score, then it might be an option worth considering.

What to watch out for

If you decide debt settlement is the right path for you, there are a handful of things you should be aware of:

  • Collection agency calls could intensify. Most debt settlement companies ask participants to stop making their minimum monthly payments as part of the debt settlement process. This means you could be hit with even more collection calls and letters.
  • Your credit score will suffer. If you do a debt settlement, your credit score will take a major hit. “As soon as you stop making your payments to your creditors, it’s going to get reported as a late payment,” Ross said. “Once you default altogether, your credit score is going to tank.”
  • There’s no guarantee your debts will be settled. No debt settlement firm can promise that your debt will be negotiated.
  • There are tax implications. If you enroll in a debt settlement program, you might still have to pay taxes on the full amount of debt before negotiation. Ross said laws vary on this from state to state.
  • You can’t be forced to pay fees on debts that aren’t settled. Be aware that debt settlement companies cannot charge you fees for debt entered into the program that wasn’t settled.

The debt settlement industry is not regulated and therefore it is rife with scams. If you’re interested in partnering with a debt settlement company, it’s important to do your research and vet the company. Check with the BBB to make sure the company has no complaints filed against them. You can also check to see if complaints have been filed with the state’s attorney general’s office.

Should you use debt management or debt settlement?

It depends on your personal situation. If the debt you hold can be paid back in a reasonable time frame, you want to take a safe path, and you’re interested in learning about how to build healthy financial habits, debt management is likely the right decision for you.

However, if you hold an immense amount of debt, but bankruptcy is not in the cards, debt settlement could be worth considering.

Regardless of the path you choose, here are some steps to help get you started:

Next steps: Pursuing debt management

  1. Find a nonprofit credit counseling agency to work with. You can consult the NFFC’s online database to find one in your area.
  2. Vet the agency appropriately. Check how long they’ve been in business, whether they have any complaints filed against them and whether they have nonprofit status. If necessary, consult a handful of agencies to find the right one.
  3. Get organized. Before you have a free consultation with the agency, get your finances in order so you know exactly how much debt you have.

Next steps: Pursuing debt settlement

  1. Shop around. It’s wise to consult multiple debt settlement companies before getting started. Compare things like monthly fees and enrollment requirements.
  2. Vet the company you select carefully. Check with the BBB to see if any complaints have been filed against the company you’re considering partnering with. You should also check to see how long they’ve been in business.
  3. Get everything in writing. If you decide to move forward with a debt settlement company, make sure you have the details of your agreement in writing.

Conclusion

You’ve taken the first step toward becoming debt-free, which is deciding you’re ready to buckle down and get started. From there, the most important thing is to do ample research and figure out which debt repayment strategy is best for you. Before you know it, you’ll be well on your way to becoming debt-free once and for all.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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7 Signs You Need a Pro to Do Your Taxes

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Completing one’s annual tax return can be a fairly straightforward process. You simply get your W-2 or 1099 forms and other necessary documents in the mail or online, then file using one of the many online software tools available.

But for some taxpayers, completing an annual tax return can cause an immense amount of stress. If your employment status and/or financial picture is complex, you might fall into this category. In addition, if you’re unsure about how the recent tax law changes might impact you, it might make sense to consult a professional this year.

Below, you’ll find seven common reasons why you should consider hiring a pro to do your taxes.

1. You had a major financial event in the previous year.

If your financial picture changed significantly in some way in the previous year, you might want to consider hiring a professional to do your taxes.

“If you’re used to doing it yourself, but you have a big tax income year with a lot of complexity, it makes sense,” said Andrew Rosen, a CFP at Diversified, LLC in Wilmington, Del.

Major financial events could include things like taking money out of a retirement account; having a significantly higher earning year; transferring jobs during the year, getting a large bonus, purchasing a home or having children who started college.

2. You’re self-employed, work as a freelancer, own a business or have a side hustle.

Perhaps you’re a freelance graphic designer. Or maybe you’re a self-employed consultant. Whatever your job may be, if you’re self-employed, you should definitely consider meeting with a pro when it’s time to do your taxes.

“If you are self-employed, I think it’s a really good idea to use [an accountant],” Rosen said. “If you’re self-employed, typically you have a lot of write-offs and there’s a lot of gray area. You want to make sure you’re categorizing things.”

One added benefit of consulting a professional if you’re self-employed is that you’ll have added protection from being audited.

“Generally, if the IRS sees that a return was done by a tax preparer, it’s less likely to be audited,” said Gary Schaider, a certified public accountant and manager at Weiss & Company LLP in Glenview, Ill. “And you have the firm’s signature behind your return, so they have some responsibility and stake in making your return correct and helping you with any IRS inquiries.”

Schaider said this protection is often why people consult a professional to do their taxes in the first place. “I think the audit risk for someone is pretty low, unless you’re amazingly wealthy,” he said. “But if you do have that signature of the CPA, that definitely gives you a better score on your tax return.”

3. You have children.

If you have children or claim other dependents, it might be worthwhile to consider hiring a professional to do your taxes. Rosen said that if you have children and everything else in your financial picture is normal, you might not need a pro. But if there’s any level of complexity to your finances, you should consider it.

If you have college savings planned for your children or monthly payments for school, for example, it could be beneficial to hire an accountant. In addition, if you have stepchildren or children from a previous relationship, you should consider hiring an accountant, as this may add a level of complexity to your tax return.

Plus, Rosen jokes, parents often don’t have the bandwidth and energy to complete their taxes.

“[Parents] typically don’t have a lot of time with their children, and taxes are complex,” he said. “I’m a firm believer in figuring out where you want to spend your time. Do you want to spend it doing your taxes and looking for receipts or do you want to dump it on someone else’s plate?”

4. You have many things to itemize.

Most people get everything they need to complete their tax return in the mail: 1099s, W-2s, mortgage interest, etc.

“I think that makes it relatively simple,” Schaider said. “But if you have anything else outside of what generally might come in the mail from the IRS, such as your own business [or] charitable expenses … you might want to consider using a professional to help you make sure they’re presented best on the return.”

Things you might be able to itemize include: mortgage interest, charitable donations, business expenses, interest on investments and medical expenses. If you plan on itemizing any of these deductions come tax season, hiring a professional can make it simpler.

In light of the recent tax law changes in 2018, you may also have questions about your itemized deductions that may not be fully deductible this year. An accountant can help you navigate these changes.

5. You had a major life event in the previous year.

If you had a significant life event in the previous year, consider consulting a tax professional to ensure you complete your tax return efficiently. Some major life events could include a death in the family, marriage, divorce or the birth of a child.

“If there’s anything unusual that sticks out, I think you should consult a professional,” Schaider said.

6. You have multiple investments accounts.

If you have investment accounts, such as college savings funds, stocks, bonds, annuities or individual retirement accounts, your financial picture is likely more complex. Consulting a professional to do your taxes can help ensure you abide by all of the tax rules that accompany these types of accounts.

7. You don’t have the time or energy, or you feel overwhelmed by the process.

If none of the above statements applies to you, that doesn’t mean you have to do your own tax return.

“Why would I tell people to have someone do their taxes? First is if you just don’t have the time or the bandwidth,” Rosen said. “I think there’s a power in outsourcing a lot of things in this world and, quite frankly, getting your taxes done has become a bit of a commodity. You can get it done fairly inexpensively.”

If you decide to consult a professional to do your taxes this year, Rosen advises looking for a certified public accountant, or CPA.

“If you’re going to seek tax help, I would look for a CPA,” he said. “You don’t have to be a CPA to do taxes. For instance, H&R Block and most [tax preparers] aren’t CPAs. If you’re going to pay for [your taxes], you’re not paying very much for a premium with most CPAs anyway. Might as well have someone who has a firm understanding of taxes.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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Pay Down My Debt

Can You Inherit Debt? Here’s What You Should Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Being in significant debt can be stressful and all-consuming. Often, what keeps people going is the thought that, one day, their debt will be paid off and they’ll have a clean slate.

But what if that debt never gets paid off? A 2017 report from Credit.com found that 73% of Americans die with debt. We’re not talking about $1,000 here or $2,000 there. The average American who died with debt had over $61,000 of it. This debt ranged from credit cards and mortgages to personal loans and student loans.

You might be wondering what happens to this debt when you die. Can a spouse inherit it? What about a child? We’ve explored the nuanced topic of inheriting debt below.

What happens when a person dies with debt?

When someone dies, the legal process of probate begins. This is the process in which the decedent’s estate — or the estate of the person who died — is distributed among creditors and any beneficiaries.

A personal representative is appointed to take charge of the deceased person’s assets and liabilities, said Bill Kirchick, a partner at Nutter McClennen & Fish LLP law firm in Boston and an officer of the National Association of Estate Planners & Councils.

If the person who died named someone in their will as an executor, this person will be the representative. If no one was named or there was no will, the probate court will appoint someone to serve this role.

The personal representative will then use the deceased person’s estate (which includes one’s savings and any other assets, such as a home, car and anything else the person owned) to pay off their debts. The personal representative will also be responsible for paying the monthly bills using the estate until things are settled.

“If you die with a will, everything goes to the terms of your will,” said Sarah Carlson, a CFP with Fulcrum Financial Group in Spokane, Wash. “And then a probate judge would oversee [everything] and your executor would help in that process. If you die without a will, then the state laws will govern how your assets get distributed.”

Can that debt be inherited?

Although this topic is fairly complex, the general rule of thumb is that debt cannot be inherited by the family member of a deceased person. There are, of course, exceptions to this rule, such as when someone cosigns on or guarantees a loan, or if someone lives in what is called a community property state. Below, we explore the nuances of inheriting debt.

When a parent dies

Generally speaking, a child cannot be held responsible for any debts their parents held when they died. Kirchick said children shouldn’t be worried about their parent’s debt or concerned that their parent’s creditors are going to come for them.

But if you cosigned on a loan for a parent or were a guarantor on a loan for a parent, you will be responsible for this debt, Kirchick said.

When it comes to a mortgage, things get a bit more complicated. If a parent leaves a child their home but it is not fully paid off, the child will likely have to sell the home and pay off the mortgage. Then they could keep any excess proceeds. If a child cannot sell the home for an amount that will cover the mortgage, they should consider consulting an attorney for advice regarding a potential foreclosure or short sale to remedy the situation.

When a spouse dies

If your spouse dies, you typically cannot be held responsible for any debts that were solely in their name. But this changes if you live in what’s called a community property state. “In a community property state, you take on the debt of your partner,” Carlson said.

In community property states, any debt obtained in a marriage is considered the responsibility of both parties, even if one partner was not involved in the debt or didn’t know about it, Carlson said. The community property states in the U.S. are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

In a community property state, for example, credit card debt — even if it’s only in one spouse’s name — can be the responsibility of the other spouse, Carlson said. In a noncommunity property state, you could likely argue that the credit card debt was only held by the decedent.

Talk to a lawyer

If you’re the executor of a will or the court-appointed personal representative for someone who has died, it is wise to speak with a probate attorney.

“Anytime you sign yourself onto any obligation, I think you owe it to yourself to review it with proper legal counsel,” Kirchick said.

An attorney can help you navigate the probate process, and will be especially useful if the person who died had numerous outstanding debts.

Inheriting debt FAQ

Below, you’ll find the answers to some common questions related to inheriting debt.

Unfortunately, if you cosigned on a loan, you will be responsible for that loan. The same applies if you were a guarantor on a loan for someone who died.

“A cosigner would be an obligor — absolutely,” Kirchick said. “And how about guarantors? I’m not signing on your loan, but I’m guaranteeing it. Well, the guarantor is responsible as well.”

If you live in a noncommunity property state, the answer is likely no. You cannot be held responsible for the credit card debt of someone who died if you were solely an authorized user. But if you were a joint holder of the account, you will be responsible for the debt.

(In a community property state, a spouse will likely be liable for the debt even if they were just an authorized user on the account.)

It depends. Some federal student loan programs offer forgiveness for the cosigner when the primary borrower dies. But many private student loans do not, and the cosigner will likely be liable for the debt.

Kirchick said it varies from state to state, but the general rule of thumb is that creditors have one year from the date of death to establish claims against a debtor who is deceased. This means a creditor would have to establish a claim with the probate court or the successor in interest within this one-year period.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Friedlander
Jamie Friedlander |

Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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