 TITLE: How to Know if a Debt Management Plan Makes Sense CONTENT: How Is Debt Management Different From Debt Settlement?\n------------------------------------------------------\nAlthough debt management and debt settlement may sound similar, they are very different. With DMPs, you are satisfying 100% of the amount you owe, while debt settlement allows you to pay less than the full balance. For that reason and more, debt settlement can hurt your credit significantly more than a DMP.\nOther ways debt settlement differs from a debt management plan:\n*   **Debt settlement firms require you to stop making debt payments.** The thought is that if you stop making payments, your account will eventually become delinquent. At that point, usually when your account is referred to collections, the creditor will be willing to settle for less than the full amount owed. While you wait out the process, late payments are regularly reported to the credit bureaus, damaging your credit. With a DMP, the goal is to keep your credit in good standing and negotiate terms that will allow you to pay the debt in full.\n*   **Debt settlement companies have a profit motive.** Debt settlement companies are for-profit businesses that usually charge a percentage of the settled debt. For example, if you owe $5,000 and your debt was settled for $3,000, the company may charge you 25% of the $2,000 they saved you—costing you $500. And though you'd be wise not to avoid credit payments as a strategy to reduce debt, these companies can't do anything you can't do for free on your own.\n*   **You may have to pay taxes on the settled sum.** Forgiven debt of $600 or more is considered taxable income by the IRS. The settlement discount, then, may not be as attractive as it initially seemed. END