Debt Settlement and Credit Counseling - A Comparison

The struggling economy and high unemployment rate has left many people short of funds. Credit cards are being used to pay for everyday expenses, and late payments and bad debt have become the norm in many households. Overdue notices and collection phone calls cause undo stress and leave people searching for alternative financial solutions. Two such options are debt settlement and credit counseling, both of which are valid ways to reduce debt.

Debt Settlement

Debt settlement, also known as debt relief occurs when a lender agrees to accept a reduced amount, or settlement, to fulfill a financial obligation. Companies will often agree on settlements in cases where they believe they might not receive further payment otherwise. The amount that is settled on is determined by the lender and accepted by the borrower, and is usually due on an expedited schedule. While account balances will be reduced with settlements, there will be serious effects to the person’s credit history and score. The overall amount paid for debt settlement is usually less than going through credit counseling, but the collection calls and letters will not stop and if the new agreement is not adhered to the lender is likely to take the debtor to court for collection.

Credit Counseling

Credit counseling services work with lenders to reduce interest rates to lower required monthly payments. Some counseling companies can also eliminate charges that were accrued due to late payments or over-limit fees. Monthly installments on a credit counseling plan are quite often higher than going for debt settlement, but it is much easier to receive cooperation from a lender since they will ultimately end up with a larger return on the debt. While credit counseling does not take points from a person’s credit score, it does show up on a credit report. Credit counseling will prevent further collection calls and letters and reduces the risk of legal actions.

Deciding on the right action to take to manage debt is a personal preference. Debt settlement is risky as it is not a sure bet. The lender might not be willing to settle or might offer an amount that is out of the person’s reach. Credit counseling is easier to put in place, but will most likely cost more in the long run since it does not decrease the principle of the loan. Seeking out information about the programs and talking to a financial professional is advisable before making a decision when comparing debt settlement versus credit counseling.

Monique Rowe is a guest writer that writes for Franklin Debt Relief.

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