Credit counseling vs. debt settlement: What to know to start your debt payoff

Core Insights - The article discusses the differences between credit counseling and debt settlement as solutions for individuals struggling with debt [2][3] Group 1: Credit Counseling - Credit counseling typically involves a meeting with a nonprofit organization to assess financial situations and determine if a debt management plan is suitable [4] - A debt management plan through credit counseling may offer lower interest rates, reduced monthly payments, or extended repayment periods, but does not usually reduce the total debt amount [4] - Initial sessions with credit counselors are often free, and there may be fees associated with enrolling in a debt management plan, which can vary based on income [7][6] - Payments made through credit counseling are consolidated into a single monthly payment, simplifying the repayment process [9] Group 2: Debt Settlement - Debt settlement companies negotiate with creditors to potentially reduce debt balances, which may result in lower repayment amounts [5] - Fees for debt settlement are typically a percentage of the resolved debt, and companies should not charge upfront fees before reaching a settlement [8] - During the negotiation period, individuals may be advised to stop payments to creditors and instead contribute to a dedicated bank account [10] - If a settlement is not reached, individuals remain responsible for any late fees and interest accrued during negotiations [11] Group 3: Credit Impact - Both credit counseling and debt settlement can impact credit scores, with credit counseling potentially causing a temporary dip due to account closures [13] - Debt settlement carries a higher risk of long-term negative credit impact if settlements are not achieved, as missed payments can lead to additional fees and penalties [14][19] Group 4: Considerations and Alternatives - Individuals should be cautious of scams in both credit counseling and debt settlement, looking for reputable organizations and avoiding upfront fees [15][16] - Credit counseling is recommended as a starting point for those unable to qualify for balance transfer credit cards or debt consolidation loans, offering lower fees and less credit score impact [17] - An alternative to using a debt settlement company is negotiating directly with creditors, which may yield favorable terms without incurring additional fees [21]