When experiencing a financial hardship, most people are overwhelmed with emotions and normally are not thinking through situations logically. There are pros and cons of all debt resolution plans, so choosing the right plan can be difficult. One of the most common questions that I hear is, “What is the difference between the credit counseling company down the road and a debt settlement plan. In most cases I will recommend debt settlement over credit counseling because it better addresses the underlying problems.
First, it is important to understand that the vast majority of us don’t care about debt. I know, that sounds weird, but it’s true. Most of us are motivated by cash flow not debt. Think about it….we buy our cars, houses, and a host of other major purchases based on the monthly payments, not the cost of the product itself. The same is true when someone is in credit card debt. We rarely pay attention to the total balance itself. We don’t recognize the severity of the problem until we can’t make the payments each month. Therefore, when someone is seeking out help with a debt issue, it is normally cash flow assistance that they are really looking to find.
Credit counseling companies look very good on the surface, they are non profit agencies and the cost to the client is normally little to nothing each month. They are widely recommended by your creditors as the first line of defense. A credit counseling agency negotiates lower interest rates with your credits and puts you on a plan to eliminate your debt in 3 – 5 years. Enrollment in a credit counseling program is reported to your credit, so this is a downfall. However, the major drawback is that your monthly payments remain very similar to where they were before enrollment. Since cash flow is rarely improved, credit counseling normally has an extremely high drop out rate. It can be a great solution if your cash flow is not an issue, but unfortunately, this is rarely the case.
Like credit counseling, debt settlement plans also have pros and cons. Debt settlement is a legal driven system, where attorneys negotiate lower payoffs of your debts as opposed to lower interest rates. The legal fees associated with these plans are higher; however, these plans typically reduce monthly payments by 30% – 40% even including these fees. Because these plans attack the debt from the cash flow angle as well as the debt itself, the drop out rate is normally much lower. These programs allow you to re-establish an emergency fund of their 3-4 year term, which is designed to permanently cut the dependency to credit cards. Unfortunately, creditors aren’t likely to negotiate these debts while you are current on payments, so your credit score is likely to take a temporary hit.
Credit counseling and debt settlement are simply band-aids. The only long term solution to financial security is a strong monthly budget. As far as which band-aid is best for you, I recommend sitting down with a specialist. Everyone has different needs and goals, and without someone taking a non-emotional look at your situation, it can be difficult to determine the best course of action.