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Debt collection

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

Both offer services to help if you are having trouble making payments on your debts. Credit counseling services are different from debt settlement companies in a number of ways:

Credit counselorsDebt settlement companies
Usually non-profit organizations For-profit companies or law firms
Advise you on managing your money and debts and help you budget your payments Offer to arrange settlements of your debts with creditors or debt collectors
Reach up-front agreements with your creditors to ensure that the creditors will not pursue collection efforts or charge late fees Often have no up-front agreements with creditors
Usually do not negotiate any reduction in the amounts you owe - instead, they can lower your overall monthly payment Typically offer to pay off your debts with lump sum payments that are less than the full amounts you owe
Do not advise you to stop paying your debt, but may help negotiate your monthly payments Usually require that you stop paying your creditors to succeed in a debt settlement program

Credit counseling

Credit counseling organizations are usually non-profit organizations that advise you on managing your money and debts. They usually offer free educational materials and workshops. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Note: Although most of them are non-profit, credit counselors may charge fees for a debt management plan to pay off your debt and take those fees out of the payments you make to them.

Credit counselors may help you organize 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. The credit counselor then 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

Debt settlement companies offer to arrange settlements of your debts with creditors or debt collectors for a fee. They typically offer 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.

While credit counselors reach up-front agreements with your creditors to ensure that the creditors will not pursue collection efforts while you're in the credit counseling debt management program, debt settlement companies often have no such up-front agreements with creditors.

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

Warning: Many debt settelment 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 settelement company settles one or more of your debts.

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 settelment program.

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.

Warning: 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.

In most circumstances, neither credit counselors nor debt settlement companies can erase all of your debts.

Tip: If you simply don't have enough income to pay what you owe, you may consider filing for bankruptcy. Filing for bankruptcy can have long term consequences so consult a bankruptcy attorney to learn whether bankruptcy is a good solution for you.

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