Debt Settlement Vs Credit Counseling

If you are having a hard time to make payments towards your debts, then it's time for you to look for debt relief. Two most common debt relief options for indebted people are debt settlement and consumer credit counseling. But many people get confused when it comes to choosing between these options. It is worth mentioning that choosing debt settlement or credit counseling would depend on your debt situation. Let's discuss it in detail.

What is debt settlement?

In a debt settlement process, you negotiate with your creditor to reduce the principal balance. You would need to pay a lump sum to the creditor in return. Note that your creditor won't even consider you for settling your debt if you have not defaulted on the loan.

Why should you settle your debt?

You would save a lot of money with a successful settlement. Most debtors save 50% or even more, especially when they hire professional services.

Since you need to make one or few payments to the creditor, you become debt free quite fast. In fact, the process of settling your debt is a faster process than debt consolidation and even bankruptcy.

Disadvantages of debt settlement

The problem with settling debt is that it can reduce your credit rating considerably. Of course, it is possible to rebuild your credit over a period of time. Also, the creditors may sue you during the settlement process. All settlement companies will advice you to stop making payments to the creditors so that the creditors agree to negotiate debt. In such a situation, the creditors can initiate legal action against you (though most lenders won't).

Understanding consumer credit counseling

If you are not too comfortable with your current payment plan, you can approach a credit counselor to negotiate a better payment plan on your behalf. The agency would negotiate interest rates and monthly payment with the lenders. It is also called debt counseling.

Pros and cons of consumer credit counseling

A good thing about credit counseling is that it won't bring down your credit score. Nonetheless, debt counseling won't help you if you are looking for a fast solution. Counseling services essentially stretches the repayment period to lower the monthly installments.
What's the right option for you?

With debt settlement, you save a lot of money. If you opt for debt counseling, you will end up paying more than your original debt. But debt counseling can be a better choice if your debt situation is not acute. This is because it won't affect your credit rating. If you are immersed in debt, settlement is your right option.