Debt Settlement vs. Credit Counseling

Using government debt and census data available in 2010, it is estimated that the average household in the U.S. is carrying nearly $7,500 in revolving debt, principally credit card debt. When you also consider the fact that approximately 54% of Americans paid their balances in full in each of the past 12 months (Source: “Financial Capability in the United States,” FINRA Investor Education Foundation, December 2009), it presents a troubling picture of the average American who is carrying credit card debt. So it should come as no surprise that there are currently a variety of debt relief options available, and also that there is an appropriate solution no matter what the specifics of your debt problem may be. Consumers should endeavor to understand the benefits as well as any shortcomings of the debt relief programs they may be considering.

Photo by Jason Dirks.

Credit Counseling

Credit counseling and a debt management plan (DMP) can benefit the consumer in several different ways. First, it can offer a single consolidated monthly payment, which simplifies the bill-paying process and offers a measure of relief for those who have trouble organizing all the due dates and payments of each individual debt. Second, it can provide interest rate relief by reducing the rates on each account. Third, it can reduce the total monthly amount paid on the debt and shorten the repayment schedule considerably. And lastly, it can provide the consumer with relief from the harassing debt collection phone calls which can plague past-due account holders. Many consumers will also appreciate the fact that, unlike debt settlement, credit counseling and a DMP will have no negative effect on their credit score.

Debt Settlement

Debt settlement, in comparison, can potentially provide an even higher degree of assistance to cash-strapped and debt-laden consumers, although it must be noted that it comes at the cost of damaged credit and is not a guaranteed process. As with any negotiated process, it is not possible to offer the consumer specific settlement guarantees in advance. Debt settlement can provide a consolidated monthly payment and some relief from debt collection phone calls. But there are also distinct differences between debt settlement and a DMP besides the issue of credit damage. A debt settlement company will negotiate the balances owed on each account, many times resulting in a 40% to 60% reduction of the overall unsecured debt. Further, interest rates and late fees can be completely eliminated, monthly payments can be reduced and payoff schedules can be significantly shortened as well. While these are benefits that all consumers desire, debt settlement should be considered very carefully because of its downside of serious credit damage and its unguaranteed and therefore variable negotiated results.