Credit Counseling & Debt Settlement Agencies

For a lot of people bankruptcy feels like a last resort as opposed to the practical legal solution that it is. Some individuals will often trouble-shoot alternative methods to bankruptcy when they are finding it difficult to make their payments each month, such as credit counseling or debt settlement services. But what’s the difference between the two? It is important to be able to recognize the distinctions, and question what each service could potentially do for you.

Credit counseling services that assist with debt can be non-profit organizations that exist to help you manage your budget and make timely payments. Sometimes they can reach out to creditors on your behalf, although it is unlikely that they will be able to arrange for a reduction in what you owe. They can, however, negotiate lower monthly payments for you – their approach is often upfront and they can communicate to the creditor that you are participating in a credit counseling program in an effort to manage your debt. Creditors are not obligated to cease collection efforts, but it may buy you some time while you figure out a repayment plan with the agency. Warning: Even though credit counseling agencies will provide free educational material and other resources, they can charge you a fee, which will either be worked into the repayment plan they work out on your behalf or will be paid first out of your payments before any of your creditors get paid. Consider whether it is worth paying an additional fee to have someone else pay your creditors for you.

Debt settlement companies, on the other hand, are for-profit companies that seek to arrange settlements with creditors or debt collectors on your behalf. Typically, they will arrange to settle for a lump sum that is less than what is owed, and take their fees from this sum. Before you sign on the dotted line, you should find out just how much is deducted in fees – some companies have individuals paying more in fees than they do on the actual balance of debt owed. And in some cases the debt settlement companies won’t even tell creditors or collection agencies that you are working with them to manage your debt, which means that these creditors are still coming after you for debt owed. Debt settlement companies may even instruct you to stop making payments altogether, which can land you in some serious hot water. Interest charges, late fees and more vigorous collection efforts may result from not paying the creditors, which only makes matters worse and increased the relentless cycle of debt.

It is best to know exactly what you are getting into before you put any more time and money into agencies and companies whose sole purpose is to manage your finances. Sadly, the fact of aligning yourself with a debt settlement company in and of itself could only make creditors or debt collectors pursue you even more aggressively. Your creditors don’t have to comply with settlement companies at all – it sometimes has the same effect    as you trying to settle all of your debts by yourself. However, your creditors do have to comply with the rules of the Bankruptcy Code if your debt to them is discharged in bankruptcy.

Credit counseling agencies and debt settlement companies can be of assistance, but for those who can’t keep their head above water, it is just likely to make a bad situation worse. If you are struggling with one type of debt, such as credit card debt, it may be worth getting some more information. But remember, you’re trusting these companies with your finances, your credit and future credit. Be wary, ask questions and be cautious, and if you have any doubts, remember an experienced, licensed attorney will be able to help you determine the best course of action. If you have any questions or want to get more information, please contact our office at 602-265-3000 to set a meeting with an attorney.