This article was written by Robert Zangrilli, CEO of Franklin Debt Relief. Two of the most popular options for debt relief are credit counseling and debt settlement. While a great deal of people have heard of these options, most people do not understand how they differ and some unscrupulous actors in the debt relief industry will do their best to try to confuse consumers about which solution is best. The truth is there is no “one-size” fits all approach to debt relief. Some people may need credit counseling, others may need debt settlement, and there are even those where bankruptcy makes the most sense. The purpose of this article is to briefly touch on the main benefits and disadvantages of all your debt relief options.
The main benefit of credit counseling is the fact that it allows you to reduce your interest rate, which in turn will lower your total cost and time frame for becoming debt free. Typically interest rates can be reduced down to 8% and one can becomes debt free in four to five years. It is important to realize, however, that because of the fact that you are paying the credit counseling company and the time frame for becoming debt free is reduced significantly, the overall amount that you spend each month will typically be similar to or more than what you would pay each month if you made the minimum payments. It is also important to understand that about three out of every four people who enroll in these programs fail to complete them because the monthly payments can be too high.
Debt settlement programs are very different in that it reduces the total amount of debt that you actually owe. In order for this to occur, your account must go into a default at least 120 days before the creditor will even consider it an option. This means that your credit score will likely be damaged by this process, you will receive collection calls, and your creditors can file a lawsuit against you in court. There is a reason why people choose this option, however, and mostly it is because it makes financial sense for them. In a debt settlement program total amount of money that you spend can be as little as half the original debt. Since you’re reducing the principal balance, the time frame to pay off debt is much faster than credit counseling, more like two to three years, and the monthly payments are also much less.
Ultimately, consumers who have the means to pay but are bothered by high interest rates are advised to avoid debt settlement programs and choose credit counseling. If your budget is tight and your primary concern is your monthly payment and overall cost, debt settlement may be a very good option for you.
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