Navigating your debt relief options may seem daunting. Debt relief and credit counseling are just two major types of debt management you might consider. With debt relief, you hire a company to negotiate a settlement with your creditors. With credit counseling, you get access to services ranging from budget planning to debt management from a credit counseling agency.
So how do you know which option is right for you? Here are some things to consider about debt relief and credit counseling.
What is debt relief?
With debt relief, you will work with a debt relief company, also known as a debt settlement company, to negotiate with some or all of your creditors. They’ll try to get your creditors to accept a settlement—typically a lump sum payment — of less money than you owe on the debt. In most cases, you would only consider debt settlement when you’ve already fallen behind on your payments.
If you work with a debt settlement company, they will probably ask you to suspend payment on your debts and instead set aside money in an account until you accumulate enough funds to pay the settlement. This comes with risks. Your creditors may file a lawsuit against you for non-payment in the midst of settlement negotiations. You’ll also keep racking up late fees and penalties. If you use a debt relief company, you’ll also have to pay them a fee. Some companies may charge as much as 20 to 25% of all your enrolled debt.
Debt settlement plans also can be lengthy, and some people find it difficult to make the monthly payments long enough to settle all of their debt. There is also no guarantee that your creditors will agree to a settlement. Debt settlement will also hurt your credit score, both if you stop paying your creditors to save money for a settlement, and after your accounts are closed.
What is credit counseling?
Credit counseling is financial advice and programs offered by credit counseling agencies. These agencies are generally nonprofit and have credit counselors that can help you create a budget, plan for your retirement, and teach you to manage your money and debts. They can also provide access to educational materials and workshops. Many of their services are free.
If you’re considering working with a credit counselor, make sure they’re connected to a reputable organization. Look for credit counseling agencies that are affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America. Credit counselors should ask you in-depth questions about your finances to get a full picture of your situation.
Depending on your financial situation, credit counselors may recommend a debt management plan (DMP). Through a DMP, a credit counselor will negotiate with some or all of your creditors to lower your monthly payments through reduced interest rates and reduced or waived fees and penalties. Unlike with a debt settlement, you will still owe all of your debt, but it should cost you less every month because your interest rates and fees will be lower. The big benefit is a shot at paying your debt off in four to five years versus the much longer amount of time it would take if you only made the minimum payments on your credit debt. Plus, you’ll pay much less interest, too.
All of your included debts are then rolled into one monthly payment that you deposit into an account held by the counseling agency. The agency then uses those funds to pay your creditors. As long as you and the credit counseling agency both make the payments on time, a debt management plan should not have much negative impact on your credit score.
How to choose between debt relief and credit counseling
The variables of your financial situation will dictate whether debt relief or credit counseling is the right plan for you. Credit counseling can be a first good step regardless of which path you eventually pick. It’s possible a credit counselor might identify ways for you to come up with more money or save more money to make inroads on your debt and avoid more drastic steps.
If you think you have the ability to stay on top of your payments if they were reduced a bit, then a DMP might make sense for you. If you’re able to stick with making the payments for several years, then a DMP should not have a negative impact on your credit score. Entering a DMP also puts a stop to being bothered by debt collectors if that’s something you’re dealing with.
If you’re far behind on your debt, and don’t see a way to steer clear, then debt relief might be an option since you will be able to settle your debt for less than what you owe. However, you’ll still have to come up with money for a lump sum settlement or for monthly payments. Debt settlement will hurt your credit score, and you won’t be able to seriously rebuild your score until you’ve settled your last account, but it is an alternative if you want to avoid bankruptcy.
How Resolve can help
If you’re dealing with debt and not sure what to do, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.