Debt Settlement vs. Credit Counseling

Things to consider

If you have ever thought about turning to one of these companies for help getting your debt under control, do your homework first. Both companies offer services to help if you are having trouble making payments on your debts, but these services differ in a number of ways.

Credit Counseling Services:

Usually are non-profit organizations
Advise you on managing your money and debts and help you budget your payments
Reach up-front payment agreements with your creditors to ensure that they will not pursue collection efforts or charge late fees
Usually do not negotiate any reduction in the amounts you owe. Instead they can lower your overall monthly payment.
Do not advise you to stop paying your debt, but may help negotiate your monthly payments.
Usually offer free educational materials and workshops
Although most of them are non-profit, Credit Counselors may charge fees for a debt management plan to pay off your debt and take those fees out of the payments you make to them.

Credit counselors may help you set up a debt management plan. Under this type of plan you make a single payment to the credit counselor each month. The credit counselor then makes monthly payments to each of your creditors.

Debt Settlement

Dealing with debt settlement companies can be risky. Some debt settlement companies promise more than they can deliver. Some of your creditors may also refuse to work with the debt settlement company you choose. In many cases, the debt settlement company will be unable to settle all of your debts.

Debt settlement companies often claim they can negotiate with your creditors to reduce the amount you owe. However, before working with a debt settlement company, you should remember:

Debt settlement companies often charge expensive fees.
Unless the debt settlement company settles all or most of your debts, the built up penalties and fees on the unsettled debts may wipe out any savings the debt settlement company achieves on the debts it settles.
Using debt settlement services can have a negative impact on your credit score and your ability to get credit in the future.
There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, it could be counted as taxable income on your federal income taxes. You may want to consult a tax advisor or tax attorney to learn how forgiven debt affects your federal income tax.
Debt settlement may well leave you deeper in debt than you were when you started. Most debt settlement companies will ask you to stop paying your debts in order to get creditors to negotiate and to collect the funds required for a settlement. This can have a negative effect on your credit score and may result in the creditor or debt collector filing a lawsuit while you are collecting settlement funds. And if you stop making payments on a credit card, late fees and interest will be added to the debt each month. If you exceed your credit limit, additional fees and charges may apply. This can cause your original debt to increase.

Avoid doing business with any company that promises to settle your debt if the company:

Charges any fees before it settles your debts
Touts a “new government program” to bail out personal credit card debt
Guarantees it can make your debt go away
Tells you to stop communicating with your creditors
Tells you it can stop debt collection calls and lawsuits
Guarantees that your unsecured debts can be paid off

Last Thoughts

If you do business with a for-profit debt relief company, the company may tell you to put money in a dedicated bank account, which will be managed by a third party. You may be charged fees for using this account.

Make sure to do your homework before committing to a program of any kind. There is a wealth of information out there to compare your options.