Debt Settlement vs. Credit Counseling

Extreme debt-eliminating measures are sometimes unavoidable.

Please note: Extreme strategies like debt settlement and bankruptcies should be your absolute last resort when it comes to attacking your debt. At the very least, you should consider credit counseling before going with either of these two routes.

It’s a sad truth that many Americans will not simply be able to use some debt-payoff strategies mentioned throughout this series, nor will they be able to get approved for a loan to consolidate their debt. So, if that’s you, then what are your options?

You could run and hide, risk civil lawsuits, wage garnishments, and having your credit ruined for the next 7 years at the very least. Or, you could meet this problem head-on and deal with it now. It’s probably going to suck in the beginning, but later on, down the line, you’ll thank your past self for not simply running away.

Debt Settlement: What is it? Is debt settlement a good idea?

Debt SettlementDebt settlement is the agreement with a lender to accept payment from you for less than you currently owe them. While that may seem like a nice and easy choice, the entire process should be a last resort.

The debt settlement process usually takes around 3-5 years to complete. The debt settlement process would convert the debt you currently owe to an installment loan that you pay off over the next few years. This loan may be through your creditors, or it may be through a debt settlement company.

If you go with a debt settlement company, you should know that federal law prohibits them from charging you anything upfront or anything until the debt has been settled. They will likely charge you fees of 25%-50% of the amount they saved you. You will also have to pay about a 25% tax rate on the difference between what you owed and what you settled for.

Furthermore, settled debt looks pretty bad on your credit. Depending on your current situation, you can expect to lose about 100-150+ points from your credit score for settling debt. This should be a last-resort option for people who are not able to file for bankruptcy. A chapter 13 bankruptcy may actually be less damaging than getting help from a debt settlement company.

The FTC has some great tips on settling credit card debt.

Filing For Bankruptcy

For those who have no viable option for making their monthly debt obligations, bankruptcy may be the only viable route that doesn’t outright involve just giving up and running away. There are two types of bankruptcies that can help you with consumer debt:

Chapter 7 Bankruptcy – For those that have had a significant change in their income or debts that make it to where they genuinely cannot pay them off, you may qualify for a Chapter 7 bankruptcy. With a chapter 7 bankruptcy, you can be relieved from most debts. (Alimony or child support are examples that you cannot be relieved from). With a Chapter 7 bankruptcy, the lender may sell off your assets to pay for the debt. If you’ve got $10,000 worth of jewelry and 3 55” TVs, then the courts may very well sell these items to try and satisfy debts with your creditors.

Chapter 13 Bankruptcy – If you’ve got some income but not enough to meet your minimum monthly obligations, then you may qualify for a Chapter 13 bankruptcy. With this class of bankruptcy, the courts will work out repayment deals with your creditors. Your debts will be relieved or discharged, but a certain portion of your income will be applied to these debts over the next 36-48 months.

Credit Counseling

Credit CounselingBefore you think about debt settlement or bankruptcy options, you may want to consider reaching out to a non-profit credit counseling agency. These are groups of trained professionals that will sit down with you to evaluate your current financial situation. They may find a way out for you that doesn’t involve debt settlement or bankruptcy. At the very least, they will help you attack the root cause of your debt and ensure you never fall into that hole again.

Don’t confuse non profit with free. These companies may still charge you an hourly rate.

Debt Can Be Overwhelming, But It’s Not The End Of The World

Being in debt can seem like a strain on many aspects of your life. It can be extremely overwhelming and mentally draining. Just know that no matter how deep into debt you may be, there is always a solution for you. It may not be easy, and it may not be fast, but the problem will eventually get fixed. Be sure to take a thorough look at your current situation.

Need to re-review the American Consumer Debt Series?

  1. American Consumer Debt – Part 1: The Facts
  2. American Consumer Debt – Part 2: Best Ways to Payoff Debt
  3. American Consumer Debt – Part 3: Consolidate or Restructure?
  4. American Consumer Debt – Part 4: Payoff Medical & Student Loan Debt
  5. American Consumer Debt – Part 5: Mortgages: America’s deepest consumer debt
  6. American Consumer Debt – Part 6: Get Rid of Credit Card Debt
  7. American Consumer Debt – Part 7: Debt Settlement, Bankruptcy & Credit Counseling

Wes Durham

Wes Durham is the founder of Develop Your Wealth. He has a long-running career is a mix of financial technology and education. His main goal is to help others develop good saving habits, money earning opportunities, debt balancing and wealth development.

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