NDSU Extension Service - Ramsey County


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Credit Counseling vs. Debt Settlement

Credit Counseling vs. Debt Settlement


            Too many bills and too little cash or credit?  For many Americans, credit counseling or debt settlement may be a solution to their financial burden.  Be aware though that there is a great deal of difference between credit counseling and debt settlement – difference that can have a long term impact on your credit.

            Credit Counseling is a way to pay down your debt that does not destroy your credit. You will pay the full balance owed but significantly less in interest. It is a proven program and creditor calls will stop. It is a great way to avoid bankruptcy. You make monthly payments to your creditors, and on time monthly payments improve your credit score.

            Debt Settlement is an aggressive approach to debt elimination that will significantly damage your credit rating, and there is no guarantee that the creditors will not seek legal action or that they will settle.

            Essentially, with a Debt Settlement Program you stop paying your creditors and go into default to make the creditors think that you are in a financial hardship and unable to pay. The account will then be charged off and sold to a collection agency. A charge off can be just as damaging to your credit as a bankruptcy. You then start saving up enough money to offer the creditors a settlement and hope that they will settle.  You will pay taxes on the amount of debt that was forgiven by the creditor and collection calls and activity will continue.

            If you can afford to make a monthly payment to your creditors, Credit Counseling is a much better solution to honorably paying down your debt.  Credit counseling is providing financial education to help you better manage your credit and other personal finances.

            Quality credit counselors will require you to participate in credit counseling and education programs either before or as a requirement for entering into a debt management plan. They will be committed to helping you not only address your current debt problems, but will also be committed to ensuring that you don’t make the same mistakes again.

            Many credit counseling services also can provide debt management plans, which involve negotiating repayment plans with your creditors.  These plans often involve securing lower minimum monthly payments or lower interest rates, but do not cause the debt to be settled for a lesser amount.  Such changes typically do not negatively impact your credit history as long as you continue to make all payments as agreed under the new terms.

            Be wary of organizations that pressure you to enter debt settlement programs and charge substantial up-front fees for their services, or who promises to remove accurate, but negative information from your credit report.

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