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

Article Content Courtesy of the CFPB and GreenPath Financial Wellness

Many of us reach a crossroads when navigating debt, especially in the face of high credit card interest rates, inflation, and any unforeseen changes in household income.

If you’re navigating credit card payments and other debt, it’s helpful to consider the best approach for your situation. To help you weigh your options, here is an overview of two approaches: Credit Counseling vs. Debt Settlement.

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

Credit counseling services to help you deal with debt are different from debt settlement or debt relief companies in a number of important ways.

Credit counseling services that assist with debt:

Usually non-profit organizations (like GreenPath)
Advise you on managing your money and debts and help you budget your payments
Reach agreed upon payment plans or agreements with your creditors to ensure that the creditors will not pursue collection efforts or charge late fees while on the plan
Usually do not negotiate any reduction in the amounts you owe - instead, they can lower your overall monthly payment
Do not advise you to stop paying your debt, but may help negotiate your monthly payments
Payment plans do not usually have tax implications

Debt settlement companies:

Usually are for-profit companies that charge a fee for their services. Generally, these companies cannot charge you until after they perform services
Offer to arrange settlements of your debts with creditors or debt collectors
Often have no up-front agreements with creditors. Some creditors will not negotiate with debt settlement companies
Typically offer to pay off your debts with a lump sum payment that you save up in an independent account that you control
Usually advise that you stop paying your creditors until a debt settlement is negotiated with creditors, which may damage your credit and result in your being sued
Debt settlement may involve debt forgiveness, which may have tax implications

Credit Counseling (GreenPath)

Credit counseling organizationsare 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: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 counseling organization each month or pay period. The credit counseling organization then makes monthly payments to 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.

VS.

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 you have to save up before a settlement. If a debt settlement company requires you to save up funds in an account, these funds still belong to you. The account must be administered by an independent third party and be under your control. You are entitled to withdraw funds held in that account at any time without penalty.

Warning: Beware of debt settlement companies that charge up-front fees in return for promising to settle your debts. You can't be charged a fee before they actually settle or reduce your debt. You should also be cautious of debt settlement companies that instruct or advise you to stop making payments to your creditors. If you stop making payments, you will likely damage your credit. You may face collection efforts, additional late fees, and penalty interest charges, and you might be sued. 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.

Other information to keep in mind

Many creditors will not negotiate with debt settlement companies. Also, many creditors and debt collectors will not negotiate how much they will settle for. Instead, they will have standard policies about how much loan 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 negotiating with your creditors and collectors yourself.
Debt settlement companies cannot guarantee the amount of money or percentage of debt that you might save by using their services. They also can't guarantee how long the process will take. Beware of companies that say otherwise.

Speak with a financial counselor.

If you’re still unsure of where to start in paying off your debt, we encourage you to connect with our partners at GreenPath for a free financial counseling session. Their professional, caring counselors will explain your options and support you to develop a personal action plan that works for you. Take the first step and give them a call today. It’s free, no-pressure, and 100% confidential: 877-337-3399

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