Debt settlement and credit counseling are both different ways of dealing with overwhelming debt. However, they also both have negative aspects to them. Before considering either option, you may want to try to get out of debt by yourself with a debt payment plan. If you have tried that in the past, these options may help you get control of your finances.
Benefits of Debt Settlement
Debt settlement is when you offer the creditor a smaller lump sum payment as settlement for the debt. Most companies will not consider debt settlement unless you are already behind on your payments. This option will allow you pay about half of what you currently owe and you can clear up your debt more quickly. You can negotiate debt settlement yourself by contacting your creditors one at a time or you can use a company to negotiate debt settlement for you.
Dangers of Debt Settlement
Debt settlement will have a negative affect on your credit report. The debts will read "Settled" instead of "Paid in Full." This may make it difficult to borrow money for several years. You will pay taxes on any debt that is forgiven during that tax year. It is important to plan ahead and save for this. Many debt settlement companies shut down unexpectedly and take the client's money without settling the debts. If you choose this route, you should carefully research a company to be sure it is a legitimate company that will live up to its promises.
Benefits of Credit Counseling
Credit counseling companies will work with you to help get your debt under control. The counseling service will help you figure out a working budget. Additionally, they will contact your creditors for you and try to lower the interest rates, and reduce any fees that you may have incurred. You will pay one lump payment to the credit counseling agency and they will distribute the money to your creditors. Generally they set a specific timeline and then you will be debt-free.
Dangers of Credit Counseling
The biggest danger of credit counseling is choosing a disreputable company or having the agency go out of business while you are using them. Be sure to do your research before choosing an agency. You want one with no complaints with the Better Business Bureau and that has been open for several years. It will affect your credit, since working with an agency will show up on your credit report, but it is better than debt settlement or bankruptcy.
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