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Debt collection

What's the difference between a credit counselor and a debt settlement company?

Credit counseling services are different from debt settlement companies in a number of ways. Credit counselors are usually non-profit organizations. Debt settlement companies are for-profit companies, and sometimes they are law firms. Credit counseling organizations and debt settlement companies both offer services to help if you are having trouble making payments on your debts.

Credit counseling organizations advise you on managing your money and debts and may help you develop a budget. They usually offer free educational materials and workshops. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to address your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions. Although most of them are non-profits, credit counselors may charge fees for their services that they take out of the payments you make to them.

Some creditors and debt collectors will not negotiate with debt settlement companies at all. Once they learn you are working with a debt settlement firm, their collection efforts may become more intense. For example, the collector may file a lawsuit against you. Many debt settlement companies will instruct you to stop making payments to your creditors.  If you stop making payments, you may face collection efforts, late fees and penalty interest charges. These fees and charges will cause your debts to grow larger. In this way, debt settlement may cause your total debt-load to grow, even if the debt settlement company settles one or more of your debts.

This is a key difference between debt settlement and credit counseling: Credit counselors reach up-front agreements with your creditors to ensure that the creditors will not pursue collection efforts or charge late fees or penalty interest while you are in the credit counseling debt management program. Debt settlement companies often have  no such up-front agreements with creditors.

Typically, a credit counselor will help you with advice and education, and by organizing a “debt management plan” for all your debts. Under a debt management plan you make a single payment to the credit counselor each month or pay period and the credit counselor makes monthly payments to each of your creditors. Under debt management plans credit counselors usually do not negotiate any reduction in the amounts you owe – instead, they can lower your overall monthly payment. They may do so by getting the creditor to increase the time period over which you can repay a loan (for example, five years).  They may also get creditors to lower the interest rates. Although most credit counselors are non-profits, they may charge fees for their services that they take out of the payments you make to them.

Debt settlement is different than credit counseling. Debt settlement companies offer to arrange settlements of your debts with creditors or debt collectors, typically offering to pay off your debts with lump sum payments that are less than the full amounts you owe. For example, for  every $100 of a loan that a creditor agrees to forgive, the debt settlement company will charge you some portion in fees.

A debt settlement company generally will attempt to get creditors to agree to settlements by first getting you to stop making payments on the debts you owe. This can be risky for you. While some creditors and debt collectors will agree to settlements with debt settlement companies, many will not negotiate how much they will settle for. Instead, they will have standard policies about how much principal they will forgive when you haven’t made payments for a certain period of time. This means debt settlement companies usually can’t get better terms than you could get by talking to your creditors yourself.

Tip: Beware of debt settlement companies that charge up-front fees in return for promising to settle your debts.

In most circumstances, neither credit counselors nor debt settlement companies can erase all of your debts. If you simply do not have enough income to pay what you owe, filing for bankruptcy may be the best solution for you. Filing for bankruptcy can have long term consequences so consult a bankruptcy attorney to learn whether bankruptcy is a good solution for you.

The Federal Trade Commission’s Telemarketing Sales Rule prohibits for-profit companies that offer debt settlement that do not meet with you face-to-face from charging or collecting a fee unless they first settle, reduce, or alter your debt.

Tip: Most debt settlement companies require that you that you stop paying your creditors to succeed in a debt settlement program.

If you stop paying your debts, your creditors will likely begin collection efforts and will start charging you penalty fees and interest. Debt settlement companies say that law suits and debt collection efforts are key factors preventing clients from successfully completing a debt settlement program.

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