Debt management vs. debt forgiveness: Which is better?

If you’re having a hard time making your minimum credit card payments, you may be looking for debt relief solutions. And, as you do your research, you may come across two common forms of debt relief: debt management and debt forgiveness. 

Credit card debt management involves expert-guided help to manage your debts and pay them off faster. Debt forgiveness, on the other hand, involves experts who work to get a portion of your credit card debt forgiven by your lenders. 

Both of these options offer ways to get out of debt, but which is better?

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Debt management vs. debt forgiveness: Which is better?

Credit card debt management and debt forgiveness programs are both potential solutions to overwhelming credit card debt — but there are certain times when one may be a better fit than the other.

When is debt forgiveness better?

Debt forgiveness works to negotiate lower balances on your behalf. These programs can be a smart move if you’re facing overwhelming credit card debt that you simply cannot afford to pay off. After all, negotiating with the creditors to reduce what you owe could mean the difference between affording your payments and defaulting completely on your debt.

“In the right circumstances, debt settlement could be just the lifesaver you need if you’re drowning in an ocean of debt,” says Tyler A. Gray, CFP, CKA, AIF and managing director of SageOak Financial, LLC. “Debt settlement should be considered a last resort for many people.” 

With debt forgiveness, you typically withhold payments to creditors, often for multiple years, as you make payments to the debt relief company each month. Those payments are held in an account and then used to settle what you owe after negotiations are complete. 

After a successful settlement, the debt is typically reported to credit bureaus as “settled” or “settled for a lesser amount,” rather than “paid as agreed.” That can impact your credit score — as can the withheld payments.

“But it might be a viable alternative to bankruptcy for folks struggling under a mountain of debt that they are unlikely to ever fully repay,” says Gray. 

There are also potential tax implications and other long-term consequences of debt settlement to consider. But if you’re unable to find a way out of your current credit card debt, having your lenders forgive a portion of what you owe can be a significant benefit — even with the potential tax and credit score impacts.

“Debt settlement is better than bankruptcy but still carries harsh consequences as a portion of the outstanding debt is written off,” Erik Nero, CFP, founder of First Step Wealth Planning, says.

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When is debt management better?

Debt management companies typically work to reduce your interest rates and help you pay your balances off more effectively. In turn, debt management programs can be a good solution for those who are struggling to fully pay off their credit card debt but can comfortably make at least the minimum payments each month. 

In many cases, the right borrower for this type of program needs some help with lowering the interest rate on their credit card or finding a way to better manage what they owe.

Debt management programs don’t typically come with the same consequences associated with debt forgiveness, either, so they can be a good option to consider if you can afford to continue making your payments. For example, your total amount of debt is paid over time so the debt is reported as “paid as agreed,” rather than “settled.” And, because no debt is forgiven, there are no tax consequences.

That said, your lenders may close your accounts as part of debt consolidation programs, which could have a short-term negative impact on your credit score. However, your credit may improve as you make your monthly payments. So, in terms of the potential impact to your credit, debt management may be the better solution. 

Ultimately, though, if debt management services don’t provide enough relief to help you out of debt, it can be smart to consider a debt forgiveness program instead. 

The bottom line

Debt management and debt forgiveness can be a great tool for those who need assistance with debt relief — but neither option will be the right fit for everyone. To decide which works best for you, it can help to consider your current financial situation and the benefits these programs offer to determine which option works best for you. Ready to get started? Find a debt relief expert now.