Understanding the Distinction Between Credit Counselors and Debt Settlement Companies

If you are having problems making repayments for your debts, you can either turn to debt settlement companies or credit counseling services. While both have the end goal of helping you resolve your outstanding debts, they do this in very different ways, which are discussed in detail below. If you need either service, read this article to find out which option best suits your needs.

Table outlining differences between credit counseling services and debt settlement companies

Credit counseling services

As stated, credit counseling organizations are non-governmental, non-profit organizations that aim to offer money and debt management advice. These services provide free workshops and educational material on the subjects. Services begin with an hour-long counseling and assessment session, after which periodic follow-up sessions are scheduled.

NB: Even though credit counseling services are non-profit, you may be charged a fee if you want to enroll into a debt management program so that they pay off your debts. Those fees will be deducted from the amount you pay monthly.

You can use a credit counselor to help you organize your own debt management plan for your debts. This allows you to pay an amount to the credit counselor who then pays a certain amount to your creditors

With these debt management plans, your credit counselor does not negotiate to reduce your outstanding debts. In lieu of that, they lower your overall monthly payment, perhaps by getting your creditor to increase the repayment period in order to reduce installments. Some counselors may negotiate with creditors to reduce interest rates.

Debt settlement companies

A debt settlement company will provide you with an arrangement wherein they settle your debts with your debt collectors and creditors for a small fee. Usually, the company offers to pay off a debt through a lump sum which is less than the total amount of debt owed. For instance, the may negotiate with a creditor to reduce the debt owed, out of which a small amount is charged in fees, e.g. $20 for every $100 of debt forgiven.

Debt settlement companies differ from credit counselors in that while the former negotiate and reach upfront agreements with creditors to stop pursuing their debt with you for as long as you’re in the debt resolution program, the latter simply negotiate to reduce outstanding amounts.

It is worth mentioning that careful research into the credentials and references of a debt settlement company is important before you sign up to use them. Be wary if a debt settlement company charges an upfront cost and claim they will settle your debts.

Warning: Some debt settlement companies may instruct you to cease making repayments to creditors. However, if you do so, you may find yourself accruing late penalties and higher interest charges as well as being subjected to debt collection efforts. These in effect increase the amount you’re owing. Unless the debt settlement company has paid up your debt in full through a lump sum, you’re advised to keep making other repayments while negotiations or your program continues.

Not honoring your monthly payments for debts not covered will put you in line for professional debt collection and the harassment that brings. Once debt collection efforts begin, you may find yourself facing a lawsuit, and this will increase the debt you owe and lower your ability to concentrate on meeting your repayment obligations.

There are creditors and debt collectors who will agree to settle your debts with the settlement companies, but many will not negotiate on the amount they agree to settle for. Usually, these debt collectors and creditors have policies that dictate the amount of principal they can forgive where a client fails to make payments for a period but wishes to begin again.

In such cases, using a debt settlement program doesn’t give you any better chance than you would have gotten if you had spoken to the creditors personally. Therefore, begin by talking to each of your creditors to find out how much discount you can get, so that you don’t pay someone to do what you could easily have done yourself.

Bear in mind also that some creditors will not agree to negotiate with debt settlement companies and may instead intensify collection efforts if they find out that you’re using a debt settlement company. For instance, the collectors may file a lawsuit to reclaim their debt.

Conclusion

In other cases, you can apply for a debt consolidation loan offered by a number of Las Vegas online consolidating companies. Such a loan pays off your small debts so that you only have a single payment to make, although with a long repayment period. These loans typically have a lower interest rate and are thus ideal for unsecured high-interest debts like credit card debt and personal loans.

In all cases, neither the debt settlement company nor the credit counselor can clear out your entire debt. If your income completely disallows you from meeting your debt obligations, consider filing for bankruptcy. This is a major step with long-term ramifications to your financial independence and credit report, so be sure to consult with a bankruptcy attorney to determine if this is the right thing for you.