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Consumer Credit Counseling vs. Debt Relief Programs
Understanding the difference between the two and which one is right for you
Due to a lack of centralized regulation on the debt relief industry and the fact that names and terms for various
debt helping services are constantly being interchanged or misused, consumers often feel overwhelmed and confused
when searching for help in managing debt . However,
a simple understanding of your personal debt situation may be the biggest help in determining what course of action
is appropriate for you.
There are two main areas in which debt helping services can assist you in. You can either be classified as, ONE, someone who can no longer make their payments but still has some income, has over $10,000 in unsecured debt, and is possibly considering bankruptcy, or TWO, someone who can make payments (or has the ability to make payments if they were lowered) and would like to lower interest rates and consolidate their payments into one lower monthly payments.
If you are a ONE then most likely the best choice for you is debt relief or debt settlement. If you are a number TWO then most likely, debt management or consumer credit counseling is your next logical step. Both debt reducing services are valuable and have their own pros and cons, and both do require customers to currently be in default on one or more of their unsecured credit accounts.
ONES, or people who need debt relief, are most likely people that have toyed with the idea of bankruptcy. Debt settlement is usually a better option than bankruptcy as it is less damaging to your credit score and history and debt settlement is looked upon more favorably by future creditors, as someone trying to pay back some of their debt, while bankruptcy is looked upon more negatively, and as an escape route for people to not wanting to make an effort to repay any of their debt.
Debt settlement companies work on a commission revenue model, which means most of the time, the more money they save you from paying in debt, the higher their commission payout will be. Most debt settlement companies can cut your debt by more than 50%, and most consumers who use debt relief programs will be debt free in 12 to 18 months. However, if you are cashed strapped it may be harder coming up with the lump sum required to pay off your negotiated balance. While some debt settlement firms suggest saving up your monthly minimum payments in order to make one lump sum pay off, understand that whenever you don't make a payment on time to any line of credit it will be reflected negatively on your credit score and history. It is important to work with the debt settlement to avoid these late payment penalties, and always consider debt settlement as a last resort and an alternative to bankruptcy.
TWOS, or people that need to undertake credit counseling, are usually people that are still able to make or could theoretically make payments on their owed debt, if they were lower.
Credit counseling services are usually non-profit companies that can help reduce debt by approximately 10% to 20%. They work by consolidating all of your payments into one lowered fixed-interest-rate payments that is paid directly to the credit counseling agency, over the next three to five years. When you undergo a credit counseling service it is important to understand that you MUST close all of your lines of credit in order to be eligible for the program. This means if you have relied on credit cards in case of an emergency you will no longer be able to use one as a fallback method. And closing your lines of existing credit will be damaging to your credit score. Make no mistake these not-for-profit companies, do make money and are often given hefty amounts of money by creditors as opposed to debt settlement firms who do NOT receive any money from creditors. However, in order to avoid debt settlement or bankruptcy it is encouraged to undergo credit counseling as a debt reducing option first.
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