Difference Between Debt Negotiation & Debt Counseling

At first glance, debt negotiation and debt counseling seem similar, at least in name. Both are promoted as a way to help people deep in debt work their way out of financial difficulties, but they do it using different methods. Whichever method you use, you should research the process and company or counselor you are considering.

Working Out a Budget

Debt counselors work with you to help establish a budget that will allow you to meet your expenses and pay your bills. This requires them to interview you about your financial situation. A debt counselor lists your income from all sources and your expenses for everything except debt repayment. Based on this information, the counselor determines how much money you have available to pay back your debts each month.

Paying Your Creditors

Debt counselors also may work with your creditors to establish repayment plans. They may contact your creditors and negotiate lower interest rates and possibly better terms for repayment. They work with your creditors based on the information they gleaned from helping you develop a budget. Many debt counselors collect the money from you each week that's needed to pay all your loan and credit card payments. They use these funds to make the monthly payments directly to your creditors on your behalf. When using a debt counselor for this purpose, you should verify the counselor is paying your bills on time each month.

Hard-Line Negotiation

Debt Negotiating companies, or debt settlement companies, collect your money and negotiate with creditors, but they take a different approach. A debt negotiator collects your payments and puts them into a savings account, after they deduct any fees due. The debt negotiator does not make regular payments to the creditors. When a debt negotiator has saved up enough money from your payments, he contacts one of your creditors and attempts to settle with them for a lower amount, possibly 50 percent of the balance or less.

Risks

Debt settlement is riskier than debt counseling. Creditors will continue to contact you about collections and may intensify their collections efforts as you become further behind. A creditor working with a debt counselor is not likely to sue the debtor as long as the payments are being made on time. Collectors may sue a debtor who is using a debt settlement company, according to MarketWatch. You also have no guarantee the creditor will settle the debt for less than you owe, and your debt and delinquency build if you do not make payments on time. Generally, you will do more damage to your credit report attempting to complete debt settlement than with debt counseling.