Debt Settlement/Credit Counseling

Debt settlement involves making payments to a company for a period generally ranging from 36-60 months until enough has been accumulated for it to individually settle each of your debts. Typically, a debt settlement company charges 10%-15% of the total debts placed with it as its fee for services. Now every industry has its good and bad actors (including the legal profession) and I do not mean to suggest that the debt settlement industry is uniformly bad, however, a google search of “debt settlement complaints” or “debt settlement FTC complaints” will quickly confirm that this industry has had its share of problems. I believe that this is largely because these services are sometimes aggressively, marketed by commissioned salespeople who recommend debt settlement as the solution to your problem with very limited information regarding your circumstances.

Even when offered by highly reputable companies, I believe the concept of debt settlement itself has several weaknesses. First, while you are accumulating the funds necessary to settle your debt, you have absolutely no protection from your creditors. They may call you directly if they wish and may even file a lawsuit to recover the money owed. I couldn't imagine anything more stressful than to have a sherriff show up at my door with a summons when I thought that my debt issues were being “handled”.  Second, fees based upon a percentage of the debts placed with the company may produce a fee much larger than you might expect. A debt settlement company charging 15% of debts placed with them, for instance, would command a fee of $6,000 for settling $40,000 worth of debt (more than three times the cost of an average Chapter 7 bankruptcy)! Third, not every creditor will agree to participate in the debt settlement plan. Fourth, I believe you are better served to have your debt issues evaluated comprehensively. Debt settlement companies usually do not have employees with the necessary background and education to competently advise you on all of your debt issues including mortgages and other secured debts, taxes, student loans, etc.. Fifth, depending upon your circumstances, it may not be advisable to defer more pressing financial goals such as retirement planning, etc. for the 3-5 years necessary to successfully complete a debt settlement plan.

Credit Counseling (or debt management) is a debt relief strategy underwritten by the creditors that restructures debt terms to make the payments more affordable. However, with these plans, the majority of the debt is eventually repaid.  Unlike debt settlement, you are not required to be delinquent in order to participate in these plans. Because these plans provide for regular payments to your creditors, they tend to be somewhat less damaging to your credit than debt settlement. Generally speaking, credit counseling has a better overall reputation than debt settlement. You improve your chances of a favorable outcome considerably when you select a firm associated with  a nationally recognized organization. Using a Credit Counseling firm that holds membership in a nationally recognized organization,  such as NFCC (National Federation Of Credit Counseling) ensures that:  (1) the counselors from which you are receiving advice are properly certified and committed to  high ethical standards; (2) reasonable fees are charged (usually no more than $25.00 per month); (3) the firm enjoys relationships with the creditors who underwrite the program that make it less likely that you will be contacted directly or be subject to a lawsuit; (4) other useful services such as budgeting assistance are offered. Critics of these credit counseling programs dismiss them as mere collection agencies for the creditors, but I do not believe that to be a fair criticism. The biggest weakness of these programs is simply that most debtors do not have the surplus funds available each month to fund them. For those with surplus funds available each month to make the required payments, which are often substantial, this can be a perfectly acceptable alternative.