Is debt forgiveness or debt management the better choice this August?

As high interest rates remain the norm and the cost of everything from groceries to housing continues to rise, it’s getting harder for those with credit card debt to fit both their necessary expenses and their debt payments into their budgets. To make the numbers work, some are cutting back on their spending. Others are refinancing or consolidating their debt to make it more affordable. But for those who are feeling truly stuck between their regular expenses and their debt obligations, two strategies — debt forgiveness and debt management — are drawing more attention.

These terms are sometimes used interchangeably, but the reality is that they’re two very different paths to debt relief, and as a result, they can have very different outcomes. One option, debt forgiveness, promises to shrink the amount you owe, while the other focuses on making repayment more affordable and structured. But while both can help lower your payment obligations, each option comes with its own set of trade-offs that could affect your credit score, taxes and even your future borrowing power.

As a result, choosing between them isn’t a decision to make lightly. Before taking a step in either direction, it’s important to understand the risks and benefits to determine which one may be the better option this August.

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Is debt forgiveness or debt management the better choice this August?

Debt forgiveness involves negotiating with your creditors, often with the help of a debt relief company, to accept less than the full amount you owe. If the negotiations are successful, you could settle your debt for 30% to 50% less than the original balance, on average, in return for a lump-sum payment on the account. That can help you save significantly on the cost of your debt.

Debt management, on the other hand, is typically facilitated through a credit counseling agency. Instead of reducing your total balance, the agency helps you set up a payment plan that works with your budget. The credit counselor then negotiates with creditors to lower your interest rates and consolidate your payments into a single monthly bill. You still repay your debts in full, but you may save significantly on interest and fees.

So, how do you know which one could be the better option this August? Here’s what to consider:

When debt forgiveness could be a better option

Debt forgiveness makes the most sense this August if you’re facing true financial hardship with no realistic path to paying off your debts in full. If you’re dealing with a job loss, medical emergency, divorce or other major life event that has reduced your income, having a portion of your debt forgiven might be your most practical option. It’s also generally worth considering if your debt-to-income ratio is so high that you’d need more than five years to pay everything off.

With debt forgiveness, the math can be compelling for the right borrower. For example, if you owe $30,000 across several credit cards and can settle for $15,000, which is a 50% reduction, you’ve essentially saved $15,000, minus fees and tax implications on forgiven debt. Debt relief companies typically charge 15% to 25% of the enrolled debt amount, so you’ll need to factor those costs into your calculations.

However, there are tradeoffs to consider, even for the right types of borrowers. One major downside of pursuing this type of debt relief is that your credit score will drop during the process, and it involves months of delinquency, creditor calls and potential lawsuits. So, it’s not necessarily a quick fix. Forgiven debt over $600 also becomes taxable income, so if you take this route, you might owe more than expected when you file your taxes. 

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When debt management could be a better option

Debt management, on the other hand, will generally work best this August for borrowers with steady incomes who are drowning due to the rapidly compounding interest charges on their credit cards. Those who are lacking the funds to continue making payments may struggle with this option, though, as you’ll still be required to pay back what’s owed, just with a lower rate and fees. 

Credit card rates are averaging over 21% this August, but a debt management plan can slash rates in half (or more) while consolidating your enrolled debts into one monthly payment. On $25,000 in credit card debt, this could save you thousands of dollars in interest and cut your payoff timeline down dramatically. And, because most credit counseling agencies are nonprofits, the monthly fees on this type of debt relief tend to be lower than what you’d pay to a debt relief company.

The catch? You’ll need to close enrolled credit cards and stick with the plan for years without missing payments. Drop out early, and you could end up worse off than when you started. But for disciplined borrowers who simply need breathing room from crushing interest rates, debt management offers a path forward this August — one that actually preserves and eventually improves your credit score.

The bottom line

Debt forgiveness and debt management both offer ways to regain control over your finances, but they serve different needs. Debt forgiveness aims to reduce your total debt when repayment is out of reach, while debt management helps you pay it off in full with reduced interest and simplified payments. 

As a result, neither is inherently “better” for everyone this August; your choice should be guided by your income, debt load, credit goals and tolerance for potential consequences. Whichever path you take, though, remember that a clear plan and consistent follow-through can help you move from debt stress to financial stability.