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Being in debt is tough. Many of us have been there, and we know how difficult it can be. Credit counseling and debt settlement are two common options people use to help handle their debt, but which option is better? The answer depends on the individual’s needs, goals, and financial condition. Here we will discuss the pros and cons of each option so you can determine what might be best for you.

Credit Counseling

Credit counseling organizations are usually nonprofit organizations that advise you on money and debt management. Credit counselors charge low or no fees to guide you through a financial tangle so that you can resolve your debts and repair your credit rating. They work with your creditors, but they also counsel you on how to best repay your debt. The process typically takes 3–7 years and usually requires monthly payments from the debtor during this period.

What is credit counseling?

During a credit counseling session, you work with a trained professional to discuss your financial situation, learn more about your money and budgeting habits, and ultimately how you can get out of debt. Credit counselors can advise you about how to best get out of debt, and they can also work with creditors on your behalf to lower interest rates and waive fees. This process takes 3–7 years on average. 

Credit Counseling Pros

There are several advantages to consider when thinking about credit counseling: 

– Credit counseling is usually a free service. You could also save money if the credit counselor is able to help you negotiate a reduced interest rate. However, your monthly payments might increase beyond the minimum required payments, as the counselor tries to get you debt-free, quicker.

– You work with a professional. Credit counselors are trained in credit card debt, loans, bankruptcy, money management, and more. This person is an expert resource and can help negotiate a lower interest rate or other terms that could improve your overall credit score.

– Credit counseling is confidential. An external company will be handling your account, so all of the details about what you owe and how much money you make should be safe from creditors.

Credit Counseling Cons

There are also a few drawbacks to credit counseling that should be considered:

– You have less control in this type of program because the counselor can freeze your credit. Meaning, it’s up to the credit counseling company (not you) whether you can still make large purchases during a certain amount of time or access additional credit.

– There are quicker debt-relief options. Credit counseling typically takes 3–7 years and results are not guaranteed. 

– Credit counselors usually do not negotiate any reduction in the overall amounts you owe; instead, they can help reduce your interest rates and fees. However, your monthly payment could end up increasing. If you cannot afford your current monthly payments or you can’t afford to pay back what you owe, this is not likely to be the best option for you.

Debt Settlement

Debt settlement is another common debt-relief option that can be used to resolve your outstanding debts. If you’re struggling to make your monthly payments or you feel like you owe too much money, debt settlement might be an attractive option. 

What is debt settlement?

Debt settlement involves negotiating with creditors to reduce the amount you owe. Debt settlement companies have more leverage when negotiating with creditors, and may help you save even more time and money. 

Debt Settlement Pros

There are several pros to debt settlement:

– You can resolve your debt for less than you owe. Since debt settlement companies have more leverage and will do the negotiating for you, you may save  up to half or more on your outstanding debts. 

– You could become debt-free in less time. Credit counseling takes 3–7 years on average. But, experienced debt settlement companies can help resolve your debts in as little as 24–36 months.

-You won’t have to pay your debt settlement company upfront.  A reputable debt settlement company will not require you to pay any upfront fees until your debts have been settled.  As soon as you begin saving to reduce your debt, settlement offers can begin. These payments are generally made to a third party to protect your money and will be used to settle your debts with creditors. 

Debt Settlement Cons

There are a few cons to debt settlement:

– Your creditors may not lower your debt as much as you’d like. However, working with a debt settlement company can provide more leverage than trying to negotiate on your own. 

– Initially, you could see a negative impact on your credit score. However, as your debts are settled and resolved, you will ultimately see your credit score improve. 

– Secured debts, like auto loans or mortgages, can be trickier to settle. For this reason, most debt settlement companies will usually only accept unsecured debts like credit card or medical bills. Reputable debt settlement companies will offer free consultations to determine whether they’re the right fit for your situation.

Should you choose credit counseling or debt settlement?

So, which one should you choose? Only you can answer this question.

Credit counseling may be the better option if your goal is to maintain stability with creditors and payments. However, if you cannot afford to pay back what you owe or need to repay less than your current balance, then debt settlement could be a better option for you.

Debt relief is not a one-size-fits-all situation, and the options can be overwhelming. Before making a decision, we recommend speaking to a professional debt consultant. They will listen to your needs and help determine the best solution for your situation. 

Credit Counseling and Debt Settlement FAQs

What is debt settlement?

Debt settlement typically involves negotiating a reduction in what you owe with your lenders. Debt settlement companies can typically secure you a better deal than negotiating on your own, as they have more leverage with creditors.

What is a debt settlement company?

Debt settlement companies offer to arrange settlements of your debts with creditors or debt collectors for a fee, often a percentage of your enrolled debt. These companies handle the negotiations and paperwork, saving you money and time while providing you the confidence that there is an experienced team behind you. 

Can I pay off my debts with a lump sum?’

Debt settlement companies work to reduce your debts with a lump sum payment. The lump-sum payment comes out of an account that you make monthly payments to. Some companies will even be able to negotiate settlements before you’ve saved up enough money for a lump sum payment.

What are the advantages of debt settlement?

If the debt settlement company negotiates successfully, the main advantage is you resolve your debt for less than you owe. This also allows you to become debt-free more quickly than if you continued paying the minimum monthly payments on your debts.

What is a debt settlement strategy?

A debt settlement strategy is when a debt settlement company negotiates on debts of multiple individuals at once instead of negotiating one person’s debt at a time. This allows the debt settlement company to have greater leverage in their negotiations because they are negotiating this larger amount.

What are the costs of debt settlement?

Reputable debt settlement companies will not charge any upfront fees for settling your debt. Once settlements have started, they will typically charge a fee that is a percentage of your enrolled debts. Even after this fee, you will typically end up saving much more than if you used other debt-relief options like credit counseling or debt consolidation.  

What if I am poorly served by a debt settlement company?

When choosing a debt settlement company, it is important to select a reputable company that is accredited. Choosing poorly could hurt your credit rating, damage your finances, and not resolve your indebtedness. Reputable debt settlement companies will provide a free evaluation to help determine if they’re the best fit for your situation.  

What if I have to pay taxes on my debt settlement?

Typically if you have debt that is canceled or forgiven for less than what you initially owed, the amount of canceled debt is taxable and must be reported on your tax return. However, there are specific laws that allow you to exclude it from your gross income which is when this reduction in debt is not taxable. To learn more about the tax implications of canceled debt, check out this update from the IRS.