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

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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.

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A Procrastinator’s Guide to Managing Your Finances

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Many of us fall victim to procrastination from time to time. And when it comes to managing your finances, avoiding or delaying tasks can get expensive very quickly.

“Our lives are busy, and sometimes we don’t want to deal with it,” says Gerri Detweiler, education director at the business credit management website Nav and author of “Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.

In fact, Detweiler remembers the price she paid the year she pushed off renewing her business filings with the state.

“I didn’t get it done right away and paid enormously for it,” she said.

No matter the reason behind your procrastination, it can lead to a financial mess unless you move it to the forefront of your to-do list. Know that it is possible to transform into a doer – even if you’re a habitual procrastinator – by adopting the small changes below to achieve big results down the line.

1. Automate as much as possible

If you’re prone to procrastination, keeping on top of payments can feel overwhelming, especially if you have multiple lenders you need to pay every month. Consider automating your payments so you can avoid late fees and charges. Detweiler advises setting up text or email alerts so you know when payments are due and if there are any changes to the minimum payment amount. You can set up automatic payments with either the lender or through your bank’s bill pay tool; all you have to do is just make sure you have enough money in your account to cover what you owe.

2. Consolidate debt so you have fewer bills to keep track of

The average person has 3.06 bank cards and 2.5 retail cards, according to Experian’s 2018 State of Credit Report. Detweiler advises keeping two credit cards active at any given time: one with a lower interest rate to use for bigger purchases where you can revolve a balance, and a second credit card that is used for everything else, including earning rewards, that you pay off in full at the end of month. Then, put the rest of your cards in a drawer once they’re paid off and use them only occasionally to keep the accounts from being closed by the issuer.

If you have multiple high-interest credit card balances, you may be able to qualify for a balance transfer card offering 0% interest for a specific period of time. While most balance transfer deals charge a 3% balance transfer fee, which is added to the amount you transfer, it may make financial sense to move multiple balances to one card with one payment. Then, devise a repayment plan to knock down that balance as much as possible during the no-interest period as your payments will all be directed toward the principal until the 0% offer has expired.

Another option is to consolidate multiple card balances or other debts with a debt consolidation loan. Depending on how good your credit score is, you may be able to find a lender offering an interest rate lower than what you’re paying on your credit cards. The beauty of a debt consolidation loan is that you can use it to pay off your debts and then have one fixed payment over a specific period of time, generally two to five years. Of course, this will only help if you have the discipline to refrain from adding new debts or purchases to your now-cleared credit cards.

If you’re really struggling and over your head with your finances, consider talking to a credit counselor that can put you on a debt management plan.

3. Turn to technology to help change behavior

If you’re a procrastinator, relying on your willpower can be challenging. Thankfully, technology can help with that. Consider turning to apps or websites to help change any unhealthy behaviors and transform any bad habits.

For instance, you could download a robo-saving app, such as Digit, or enroll in a savings program like Bank of America’s Keep the Change, that help make saving as painless and out-of-mind as possible. Remember that small financial goals (like saving $5 per day versus $150 per month) will seem more achievable and can help lead to big improvements.

Other apps or websites aggregate information about multiple accounts, so you can see what’s due and what’s outstanding on a weekly or monthly basis, can also come in handy. Detweiler suggests Mint, Credit Karma, or the EveryDollar budget app. She also suggests setting reminders so you can remember to log in regularly. When you see the progress you’ve made in a chart or graph, it acts like a reward that is sent to your brain, which is key to long-lasting behavior changes, as journalist Charles Duhigg noted in his book “The Power of Habit.”

Whether your procrastination is the result of being really bad at time management or overly demanding standards that result in unhealthy levels of perfectionism, it helps to be aware of what’s causing any counterproductive, irrational behavior so you can determine how to do better.

For instance, if you’re really bad at estimating how long it’ll take you to finish a task, then make a habit of starting earlier than you normally would. Or, if your overly demanding standards stop you from getting started, then remind yourself before you start the task that “done” is better than perfect and think back to times that procrastination has proven harmful to you.

Changing behaviors, like managing your time better or reducing any anxiety you feel when tackling big tasks (like paying multiple lenders every month), can be challenging, but not impossible. Breaking things down into small, simpler tasks and using technology to help you as much as possible can set you on a fresh path to break unhealthy habits and lead to big improvements on your finances.

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.

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Got Tax Debt? Here’s What to Do

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Some people are fearful of the IRS. But if you are someone who owes tax debt to the IRS, you need more than a little bit of healthy fear to get you through — you need a plan. Here’s what you can do to pay off tax debt.

7 steps to pay off tax debt

Make an initial payment.

If you can’t pay your tax bill, one strategy — according to the IRS — is to make an initial payment based on how much you can afford, then work to determine a plan for paying down the rest of your debt.

Determine how much you can pay.

When faced with what seems like a staggering tax bill, don’t panic. The important thing is that you don’t ignore the IRS. One of your first steps should be to determine how much of your tax bill you can afford to pay. And keep in mind that whatever you don’t pay will be subject to accruing interest and penalty fees.

Choose a payment option.

Once you have settled on how much of a payment you can make, you have to make that payment. These are the main options for payments: using the electronic federal tax payment system, which is free, but is most suitable for businesses or large payments and requires enrollment; electronic funds withdrawal (which can be done during e-filing) straight from your bank account or from the IRS mobile app, same-day wiring (which may carry bank fees), a check or money order, or cash at a retail partner.

Ask for an installment agreement.

If you know you can’t make your payment in full, you can apply online for a payment plan through the IRS. Your eligibility for a payment option will depend on your individual tax situation.

To apply for an installment agreement, you have to fill out an application online that will include information such as your Social Security number, your most recent tax return filing date and your basic personal information. There are three options for a payment plan: a full payment, a short-term payment plan that will require paying in less than 120 days and a long-term installment agreement to pay over more than 120 days. In general, you are eligible to apply online for the installment agreement if you owe $50,000 or less in combined tax, penalties and interest fees and you have filed all your tax returns. The Federal Trade Commission also notes that the IRS usually can’t deny an installment agreement if you owe less than $10,000.

Ask for an offer in compromise.

Contrary to what you may think, the IRS is willing to work with you if you have tax debt and can’t pay what you owe. According to the IRS, it will consider what it calls an offer in compromise if you can’t pay your bills — and if doing so will cause a financial hardship to you.

An offer in compromise is something that can be considered after you have exhausted other options. It is based on several factors that the IRS will assess, including:

  • Your ability to pay
  • Your current income
  • Your total debt and expense obligation
  • Your assets and equity

If you can put together a reasonable offer in compromise, the IRS notes that it is generally able to accept the offer if it represents the most it can expect to collect within a “reasonable amount of time.”

There are some qualifications that you have to meet to be considered for an offer in compromise, which is detailed on the IRS website. When you submit your offer, you will have to choose one of two payment options to show the IRS your offer is serious: a lump sum or a periodic payment. The lump-sum offer consists of you including 20% of the total offer amount. If the IRS takes your offer, it will keep that 20% payment and you will pay the rest in up to five payments. If you go the periodic payment route, you’ll still submit an initial payment with your offer application, but you’ll make monthly installments while you wait to hear back from the IRS. If it does accept your application, you’ll pay monthly until your offer is paid off.

In some cases, if you meet certain low-income qualifications, your application fee, initial payment and monthly installments will be waived while your offer is considered. While the IRS considers your offer, you are required to make any associated payments with your offer, and any other collection activities will be suspended. If you don’t hear back from the IRS within two years of your offer, it is considered accepted.

Ask for “Currently Not Collectible” status.

Depending on your financial state, the IRS may determine that your account is not collectible at the moment and temporarily pause collection until your status changes. To be eligible for the status, you may have to complete a Collection Information Statement and submit proof of your finances, such as your monthly income and assets. Even if the IRS determines that you are in a not-collectible status, your debt will still be susceptible to penalties and interests until the full amount is paid. To request a delay in the collection process, you have to call the IRS.

Work with a professional.

Although it might seem counterproductive, it may be helpful to hire a tax professional who can help you sort through your options and make a plan. The IRS recommends that if you choose to work with a tax professional, you make sure you vet their credentials. There are certain rules pertaining to debt collection, and you always have the right to work directly with the IRS instead of a debt collector.

What you should know about tax debt

Tax debt can occur in large or small amounts. Essentially, as soon as you fail to pay what you owe the IRS, you have tax debt. Here’s what you should know about tax debt.

IRS collection practices. The official collection practice for tax debt begins after you have received your tax bill from the IRS and failed to make your payment in full. After you receive your first tax bill, the IRS will send you one more bill before enacting collection actions. But, in the meantime, the amount you owe will continue to accrue interest and possible penalties.

Once the IRS has sent your final tax bill, it will move to collection actions, which can range from using any future tax refunds to seizing your property and assets or showing up at your home or business.

Statute of limitations. In general, the statute of limitations on a tax liability for the IRS is 10 years. After the statute of limitations expires, the government no longer has the right to pursue collecting that liability.

Always file your taxes. One of the best ways to be proactive against tax debt is to make sure that you always file your taxes by the IRS deadline and work to make any type of payment that you can. Delaying, either with filing or with debt, never pays off. It’s always best to work with a tax professional to file your return to make sure that you reduce your chance of an error.

Don’t ignore notices from the IRS. As tempting as it may be to think that ignoring notices from the IRS will make them forget about any debt you owe, it doesn’t exactly work that way. In fact, the longer the IRS doesn’t hear from you or is unable to reach you, the more it may increase its efforts. For instance, the IRS could turn to seizing property, your bank account and your possessions, or issuing you a summons.

The bottom line

If you find yourself in a situation where you have tax debt, you have options. You can work directly with the IRS and submit details of your financial status to come up with some sort of payment plan or even temporary deferment depending on your specific situation.

The most important thing you can do is communicate with the IRS and take steps to show it you are serious about making some form of payment.

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.

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