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Dealing with overwhelming debt can be a challenging and stressful experience. Luckily, there are many ways to get out of debt and regain control of your finances. Two popular options are debt settlement and credit counseling. This post will explain the contrast between debt settlement vs. credit counseling and outline the benefits and drawbacks of both options.

Debt Settlement: An Overview

Debt settlement is when you talk to your creditors to lower the total amount you owe. Usually, a company or negotiator will bargain for you to lower the main amount of your debt. The aim is to come to a deal with your creditors. You pay a smaller sum of money to clear your debt, which is usually much less than what you owe.

Pros of Debt Settlement

  • Debt settlement can greatly reduce the amount of debt owed. It’s the main benefit of this option. This can make it easier for you to pay off your debt and regain control of your finances.
  • When you settle your debt, you make one payment to your creditor. This makes repayment easier since it’s one lump-sum payment.
  • Settling your debts successfully can help you avoid bankruptcy. Bankruptcy can hurt your credit score and make it hard to get loans in the future.

Cons of Debt Settlement

  • Debt settlement can hurt your credit score. When you settle an account, it may be reported on your credit report as “settled for less than the full amount,” which is bad for your credit. This can make it more difficult to obtain credit in the future.
  • You may need to pay taxes on the amount of debt forgiven by the IRS. This could make you owe more in taxes.
  • There’s no assurance of success. Your creditors may not agree to a settlement, and you may have to pay the entire debt if the negotiations fail.

Credit Counseling: An Overview

Nonprofit organizations and certified credit counselors offer credit counseling services. They can help you create a personalized plan to manage your debt and improve your finances. Credit counseling involves reviewing your finances. This includes your income, expenses, and debts. A credit counselor will offer custom advice and suggestions after evaluating your situation. This could involve a debt management plan (DMP).

A DMP is a plan that helps you pay off all your unsecured debts by combining them into one payment per month. The agency that helps you with credit counseling will talk to your creditors. They will lower the interest rates and waive fees. This makes it easier for you to gradually pay off your debts.

Pros of Credit Counseling

  • Credit counseling offers financial education and guidance that aid in developing better money management skills and habits for the future.
  • A DMP can lower interest rates and remove fees, helping you pay off debt in an affordable manner.
  • A DMP gives you a clear and structured repayment plan. This helps you manage your debt and stay on track with your payments.
  • Credit counseling and DMPs usually won’t hurt your credit score much, unlike debt settlement.

Cons of Credit Counseling

  • Credit counseling and a Debt Management Plan (DMP) may take more time than debt settlement. With credit counseling and a DMP, you will need to make monthly payments for 3-5 years.
  • Credit counseling doesn’t reduce the amount you owe. It only lowers the interest rates and fees. This means that you will still be responsible for repaying the full amount of your debt.

Choosing between Debt Settlement and Credit Counseling

When choosing between debt settlement and credit counseling, assess your unique financial situation and objectives. Here are some factors to keep in mind:

  • Debt settlement works best if you have a lot of unsecured debt, like credit card debt or medical bills. If you owe a little or have both secured and unsecured debts, credit counseling might be a better fit for you.
  • If you can make monthly payments and commit long-term, credit counseling and a DMP may be better. If you can’t pay regularly and have a sum of money to pay off your debt, settling your debt could be the better choice.
  • When settling your debt, remember to think about taxes. The part of your debt that is forgiven may be considered as income and taxed.