Q: Is Debt Settlement the same as Consumer Credit Counseling?

No. Debt settlement does not work like consumer credit in most respects. The goal of the debt settlement is to reduce the overall amount of the debt, by negotiating agreed payoff amounts with your creditors. Debt Settlement can save you thousands of dollars and years of repayment.

Consumer Credit Counseling Companies typically have a non-profit status. Many consumers confuse "non-profit" with "no charge for services", or charity. Non-profit Consumer Credit Counseling Companies generate millions of dollars each month and employ thousands of people. The way Credit Counseling works is that you typically meet with a Credit Counselor who analyzes your unsecured debts, other obligations, and your monthly income. A credit counselor then formulates a monthly budget and presents a plan that includes lowering of credit card interest rates and sometimes, the monthly payment. The Credit Counseling Company then contacts all your unsecured debt Creditors and requests that the consumer be permitted to enter the bank's hardship repayment plan at a lower interest rate. Most hardship plans are for a 12-18 month period. Note: most Consumer Credit Counseling programs run 48 – 60 months. During the program a single payment is sent to the Credit Counseling Company and they in turn make payments directly to all your creditors for the next 48 – 60 months.

The consumer credit counselor charges what seems like a relatively small fee. What you are not told is that the Credit Counseling companies act as a surrogate of the Credit Card Company. They make most of their money from "donations" from your Creditors based on the amount they "collect" from you while in the program. This is an arrangement very similar to the way collection agencies are paid by creditors. So a credit counseling company may not have your best interest at heart. These donations are the primary purpose for these companies organizing under a "non-profit" status (for-profit companies cannot receive donations).

The downside to credit counseling is as follows:

• In a Credit Counseling program you pay the full amount of debt owed at a hopefully reduced interest rate.

* Credit counselors don't always make timely payments resulting in late fees and a derogatory credit history.

* Not all Creditors agree to reduce your interest.

* Almost all Creditors require you to be at least 30 days late before entering hardship programs (late payment history);

* Payments are still high and it typically takes 5 or 6 years to pay off the debt.

* Credit counseling companies frequently advertise 50% lower monthly payment, but this almost never happens. Even if it did happen, smaller monthly payments would only string out the program period and not get you out of debt;

* Most Credit Counseling programs have a high failure rate.

* Many of these companies are funded by your creditors – the very people to whom you owe money. In other words, they may not represent your best interests.

* Additionally, your credit will have a CC or Credit Counseling mark on it. This is viewed negatively by most lenders and may hinder your ability to refinance a home or get a loan.

 

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