Being in debt is stressful. That’s why you’ve decided to do something about it—and that’s a good thing. But now comes the added stress of figuring out exactly which of the many debt relief programs and debt relief options is the right one for your financial situation. It can feel overwhelming to try and sift through the pros and cons of the different options and try to land on the best one for you.
This article is written to help you compare just two of the more popular options: consumer credit counseling (which can include debt management) and debt settlement. We’ll delve into both options and explain how they work and who they work best for so you can get one step closer to figuring out which one might be best for you.
A counseling session is a great place to start if you need help with your financial affairs. The counselors are highly skilled at analyzing your information, outlining available options, and designing money management programs that can help eliminate not only your debt but the stress that goes with it.
Credit counseling can give you the tools you need to get your finances under control. It can help you put processes in place to ensure you make mortgage, credit card, and other payments on time, while growing your savings as well. It can also be effective for consumers unsure of how to approach their creditors about negotiating payment plans or settling their debts.
Credit counseling can be done in-person, over the phone, or online—whichever is most convenient for you. A certified counselor will spend an hour or so with you to gather information and get a general idea of your economic situation.
Credit counseling agencies typically provide five main services:
- General Budgeting
- Debt Management Plans
- Bankruptcy Counseling
- Student Loan Counseling
- Housing Counseling
The counselor will want to know about your income, assets, expenses, and your financial goals. It’s a good idea to have all this information ready before you begin the conversation with your counselor. They’ll ask about the circumstances that got you into debt, and what you’ve done so far to take care of it. At the end of the first session, you and the counselor may decide that more counseling would be helpful.
Depending on your personal situation, the counselor may recommend a Debt Management Plan (DMP). For some consumers, it can be a savvy debt relief strategy. If this is the case for you, the counselor will propose a plan that will allow you to consolidate your debts into one monthly payment with a lower interest rate. If you enroll in a DMP, you can expect your debt to be cleared within three to five years.
If it turns out that the best method for putting your debt behind you is bankruptcy, you’re required by the federal government to undergo two sessions of credit counseling. The first session is known as “pre-filing counseling” and then at the end of the bankruptcy process, before your debts are discharged, you’ll need to do a pre-discharge counseling session. These meetings are designed to inform you about the bankruptcy process and to educate you on how to avoid getting into debt again.
If you’re having difficulty paying back student loans, the counselor will review your entire economic situation and may speak with your loan issuers. They’ll take into consideration your expenses and all your loans and other debt to figure out what the best path is for you. The federal student loan repayment options available to you will depend on whether you’ve been able to make payments on time or whether you’re in default on your loan.
This type of counseling can help if you’re having trouble paying your rent or mortgage or need advice on how to buy your first home. The counselor can advise you on issues like how to avoid foreclosure, protect your credit, create a budget, and can provide other helpful resources.
Debt Management Plans (DMP)
Most consumer credit counseling agencies will provide some, if not all, of the services outlined above, but they’re primarily known for the Debt Management Plans they offer. If appropriate for your situation, enrolling in a DMP could be the answer you’ve been looking for in your quest to become debt free and financially stable.
While credit counseling is usually free, if you enroll in a DMP, you will pay a fee for the service. A DMP is a less drastic form of debt relief than bankruptcy or debt settlement, which we’ll outline and compare later.
DMPs usually last from 36 to 60 months and, if you qualify, are a methodical way to pay down your outstanding debt. A DMP combines multiple debts into one monthly payment, which you’ll make directly to the credit counseling agency. The agency will then distribute these funds between your lenders/creditors and negotiate with them to reduce the amount of interest you’re paying on your balances. This process is different from debt settlement since your debts are not settled for a lesser amount. In fact, the monthly payment plan could end up being higher than what you’re currently paying.
- Effective method of paying off debt faster
- Easier to keep track of payments with debts combined into one payment
- Could save money with late fees removed and interest rates reduced
- Avoids the need to deal with collection calls
- Less severe impact to your credit than debt settlement
- Restricted to credit card debt—can’t be used to pay off medical bills, taxes, or student loans
- Plans can take 3 to 5 years to complete
- Unable to use credit cards or get new ones (may be allowed to keep one under certain limited circumstances)
- If you miss a payment, program will end
- Not all creditors participate in Debt Management Plans
What to Look for in a Credit Counseling Agency
Like any other major purchase or decision, it’s worth taking the time to research your options. Decide what you’re looking for in an agency and go online to learn about the practices of certain companies. Find out what other consumers have to say about them and how they rate them. In addition, ask for referrals from friends and family, your financial institution or your local consumer protection agency.
The first counseling session should be free. The counselor will review your entire financial state of affairs with you. They’ll help you calculate your monthly income and expenditures, and brainstorm ways for you to make more money and spend less. During this session, your counselor will also review your credit card debts, their interest rates and terms, and your payment histories.
It’s important to choose a legitimate agency. During the research phase, or when you first reach out to the agency you’re considering, check that they’re licensed in your state and accredited. Accredited agencies will employ certified counselors and have strict guidelines concerning data security and customer service. Be aware that not all agencies with a “non-profit” status are legitimate. This status doesn’t automatically mean that the agency’s services are free of charge, and they may, in fact, charge high fees that are not immediately obvious.
What to Expect from a Debt Settlement Plan
Debt settlement, also known as debt resolution or debt negotiation, is another type of debt relief program. It’s best suited for consumers struggling with a large amount of unsecured debt from credit cards, medical bills or private student loans. It won’t work for debt from auto loans, mortgages, or federal student loans. If you’re having trouble keeping up with (or are already behind on) the minimum payments on your credit cards and you’re considering bankruptcy or credit counseling, debt settlement could be the right solution for you.
Freedom Debt Relief is a debt settlement company and we have been offering our program to consumers since 2002—longer than most, if not all, other debt settlement companies. Our debt settlement program works this way: We negotiate with your creditors to settle for less than the overall balance of your debt and then you pay off that lower negotiated amount to the creditors. Learn more about the details of how our debt settlement program works.
Debt settlement is different from other types of debt relief program, like the Debt Management Plan mentioned above where the company’s representatives negotiate lower interest rates and send the payments to your creditors on your behalf. With a debt settlement program, you still fund the payments to your creditor – The debt settlement company does not control your funds and does not pay your creditors.
You could try to negotiate with your creditors on your own, but it can be very stressful. Unless you’re experienced in this type of financial discussion, you may not be successful in getting your creditors to reduce the amount you owe as much as a debt settlement company that has established, long-term relationships with them could. If you are comfortable letting negotiation experts handle your settlements for you, it makes sense to go through a debt settlement company like Freedom Debt Relief. We have years of negotiating experience, which enables us to often times get creditors to accept significantly less than the amount owed, which means we can get bigger savings for our clients.
When you enroll in a debt settlement program, you make a monthly deposit into a special purpose or dedicated account. The amount you deposit is based on how much debt you have, how soon you want to be out of that debt, and how much you can afford each month.
Once the balance of your account grows to a certain amount, the debt settlement company will begin contacting your creditors to negotiate settlements for less than the amounts you owe. Since the company cannot begin negotiations until there is enough money in the account that they can offer as a settlement, it may take several months in the program before any settlements are reached.
In addition to the company negotiating on your behalf, it can be quite a relief to have someone on your side after all the stress of mounting debt or trying to get it under control on your own.
Unfortunately while the debt settlement industry has helped thousands of people, it also has its share of disreputable companies. That’s why it’s important to choose a reliable one with a good track record, like we have. Not only is Freedom Debt Relief accredited by the Better Business Bureau, we are a founding member of the American Fair Credit Council (AFCC), a group committed to promoting legislation designed to tighten debt relief industry regulations and protect consumers. Since 2002, our skilled negotiators have helped hundreds of thousands of Americans resolve billions of dollars in consumer debt—much more than any other debt settlement company in the country.
The Benefits of Debt Settlement
- Affordable monthly program deposit
- Can resolve debts faster than making minimum payments
- Easier to qualify for than a loan
- Saves money by letting you pay back less than original debt owed
- An alternative solution to bankruptcy
The Drawbacks of Debt Settlement
- Need to research and choose carefully to avoid disreputable companies
- Individual negotiations needed for each creditor
- Negative impact on credit score with missed payments while settlement is negotiated
- Fees charged—usually a percentage of the amount owed on the account
- Not all creditors work with all debt settlement companies, so sometimes you may need to be involved
What’s the Best Option for You?
Consumer Credit Counseling:
Undergoing credit counseling and subsequently enrolling in a Debt Management Plan (DMP) could be the best choice for you if:
- You’re able to handle the monthly payments calculated by the DMP
- Your credit card debt amount is less than $10,000
- You still have at least one credit card in good standing
This strategy could help protect you from lenders starting collection proceedings against you and could also prevent you from becoming delinquent on your payments.
Debt Settlement Program:
This option may work better for you if:
- Your debt is $10,000 or more
- You can’t afford your monthly minimum payments
- You want to resolve your debt in a shorter amount of time
Depending on how much you owe and to whom, you could be debt free in as little as 24-48 months.* This timeframe is much faster compared to the years it might take making only minimum payments on your cards each month and the average 36-60 month duration of a DMP.
Regardless of whether you choose credit counseling or debt settlement as the answer to paying off your debt, you’re on the right path already by researching your options. And if you have more questions about debt settlement, one of our Certified Debt Consultants can answer any questions you may have. Let us get you one step closer to finding the right debt solution for your budget and goals by giving us a call any time at 800-230-1553.
The goal of the highly trained counselors who work for Freedom Debt Relief is to help you find the best way forward to overcome your debt and create a brighter financial future. Our counselors will work hard to help you find the right strategy—even if it’s not our debt relief program—without any high-pressure sales tactics. Find out if credit counseling or debt settlement is the best solution for you by either requesting a free debt evaluation or by calling a Certified Debt Consultant now at 800-230-1553.