Both credit counseling (also referred to as debt consolidation) and debt settlement companies offer services to help you with your unsecured debt. The similarities, however, end there. These are 5 key differences between the two services:
|Normally non profit organization||Normally for profit organization|
|Counsel consumers on budgeting and money management||Offer to negotiate debts for a percentage of balance|
|Send proposals to creditors to remove late fees and lower interest rates||Send no up front offers to creditors|
|Developed to prioritize the consumer’s credit rating over time||Creditworthiness of consumer is destroyed|
|Consumer’s bills remain current and are paid in full on a monthly basis||Consumer is advised not to pay bills resulting in possible legal action|
Credit counseling agencies charge fees that are legally allowed depending on the state of residency of the debtor. These fees are small in comparison to the fees charged by debt settlement companies. The consumer makes a consolidated payment to the credit counseling agency and the agency then sends payment out to the various creditors. Credit counseling is the best course of action for a debtor to take when maintaining or attaining good credit is important and when a debtor wants to stay out of court.
Debt settlement companies normally charge a percentage of the amount saved per debt. If the debt settlement agency is a law firm, a retainer amount may be charged up front and held in trust while the debts are negotiated. The consumer is advised not to pay the creditors in order to gain leverage. Payments are then collected by the settlement agency on a monthly basis until there is enough in trust to settle with one of the creditors. As the debts are settled, the agency collects its’ fees. While this process is ongoing, creditors may send the debts to collections and commence legal action against the debtor. Some creditors will not settle and opt to take the debtor to court.