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Credit Counseling vs Debt Settlement

For anyone with serious debt issues, the quandary arises as to which route to go for debt relief. The most used model for many years was credit counseling, but that has been recently passed up by new kid on the block, debt settlement. We'll look into the reasons for this change and why debt settlement is better than credit counseling.

First let's look at how credit counseling works. With this option, the credit counseling agency renegotiates with the creditors to get you a lower interest rate and change your compounded interest payments to simple interest payments. These new monthly payments will be equal to, or a little less, than what you are currently paying. Most importantly, depending on your debt amount, you will be debt free in just 3-5 years, instead of 30 plus years. The negative of credit counseling is that most creditors look at it as the same as a bankruptcy and it stays on your credit report for up to 7 years.

Now let's look at Debt Settlement. Like credit counseling, debt settlement can be only used in consolidating unsecure debt such as credit cards, medical bills, and collection accounts. It cannot be used for secured loans like home or auto loans. How it works is that a debt settlement agency negotiates to reduce your unsecured debt by as much as 45-60%. It then sets up a monthly payment plan that is usually about half of what you're paying now. The monthly payments are put into a trust account that is only in the consumer's name. From this trust account, the money is distributed to the creditors to the pay off the amounts that were previously negotiated.

The best part of the Debt Settlement Process is that you will be making much lower payments and you will settle your debt in just 2-3 years (depending on debt amount).

One negative note about debt settlement is that your creditor will report your account as late until it is settled. So it may not be for those consumers who have never been late on their monthly payments.

To summarize, debt settlement is better than credit counseling because your payments are about half as much and you'll be done and paid in a much shorter period. Plus, unlike debt counseling, debt settlement doesn't show on your credit report for 7 years.