Credit Counseling Versus Debt Settlement

Credit Counseling and Debt Management Services differ from debt settlement programs. Family Credit Management Services is a Christian debt management organization dedicated to helping individuals become debt free. Our debt management services include both credit counseling services and a specialized debt management program designed to assist those who are struggling with excess debt.

In contrast, debt settlement is the settling of debts for less than the original balance. For example, a consumer may owe $8000 on Credit Card A. Credit Card A may agree to accept $5000 as payment in full. The consumer pays less out of pocket to become debt free and the creditors stop harassing him.

Here's how the process works. A consumer contacts ABC Debt Settlement Company for debt help. He makes monthly payments to this company instead of the original creditors. These payments are put into a settlement fund and held by ABC. When a sizable sum of money is accumulated, ABC will contact the original credit card company to negotiate a settlement for so many cents on the dollar.

Sounds like a good deal, right? Not always. Take the following factors into consideration.

1. Debt settlement can damage your credit report. Most creditors will not accept a settlement made in monthly payments and the majority of consumers do not have a large chunk of money available to pay off the debt. (They wouldn't be seeking debt help if they did.) Because most cannot afford to make monthly payments to the creditors directly while building up a settlement fund, they will be forced to stop paying directly. During this time, the account will fall past due and reflect negatively on a credit report. Payment history accounts for 35% of your credit score!
2. Harassing collection calls. During the time of accumulating a settlement fund, creditors will continue with their standard collection practices. This includes distressing letters and phone calls by both the original creditor and a third party collection agency.
3. Threat of lawsuits. In attempts of collecting the debt, creditors may file a lawsuit against a consumer.
4. Tax penalties. The balance forgiven by the creditor may be considered taxable income by the IRS. Be sure to see a tax advisor for specific details.

When is debt settlement a good idea?
Family Credit Management Services believes that debt settlement is appropriate in very select situations. Because of the potential negative effects on a consumer's credit report, debt settlement should only be considered when an account is already severely delinquent with a credit report reflecting the status. If the credit report is salvageable, seek other debt management services.

How is debt settlement different than a debt management program?
A debt management program, such as one administered by Family Credit Management Services, works with creditors to provide debt help by reducing interest rates, stopping late and over limit fees, and bringing the accounts current. These concessions should shorten the debt repayment time. Monthly payments are paid to the credit counseling service and then distributed to the creditor approximately within one week. Consistent payment history should be reflected on a credit report. The balances are paid in their entirety. Since each financial situation is unique, our credit counseling services and specialized debt management program are highly personalized to address individual circumstances and needs.

A debt settlement agency does not negotiate interest rates or fees. Monthly payments are collected from the debtor, but the settlement company does not sent monthly payments to the creditors. The company negotiates a reduced-balance settlement agreement.

What are the experts saying about debt settlement?
While there are situations in which debt settlement is a viable option, those situations are few and far between. Today Show Financial Editor, Jean Chatzky, recommends credit counseling rather than debt settlement due to the effect on a consumer's credit report. To read the full article, click here.

A recent Business Week article warned consumers about the high fees that can leave them in worse financial shape, not to mention the extremely low success rate of this type of program. To read more about what Business Week had to say, click here.