Some people think that credit counseling has similarities to debt settlement because both options have the end result of eliminating debt. However, credit support and a debt settlement program is completely different when it comes to the process of disposing of debt. With credit analysis and debt management, the company provides analysis services and debt management options for the person in debt.
On the other hand, debt settlement works by settling obligations for a lower amount than the first balance. For instance, you owe $7500 to a credit card company. The company can settle for $5000 if you pay the amount in total. This way you pay less than what you owe.
The process of a debt settlement program is simple. You go to a debt settlement company to request debt help. And instead of paying your original creditors, you make standard payments to the debt settlement company. The debt settlement company then holds your cash in a settlement fund. When your settlement fund amasses into a substantial amount of money, the debt settlement company will then contact your original creditors to arrange for a settlement.
Debt settlement appears to be a good deal. But don't stop there yet. You have to consider several factors before going for a debt settlement program.
First, you have to be aware that debt settlement can hurt your credit standing. Majority of creditors don't accept staggered payments for one big balance and most patrons do not need to cash to pay the debt in total. Since consumers can't afford to pay their lenders as well as wait for a settlement fund to accumulate, they have a tendency to stop paying their lender directly.
This action will lead to the account being overdue and so reflects negatively on one's credit history. Remember that payment history makes up 35% of your credit report. Aside from this, you may continue to receive collection calls and letters because creditors continue with their collection practices while you wait for your settlement fund to increase. Worse, you can even end up facing a suit if the company gets desperate waiting for your payments.
In case your debt settlement pushes through, you can expect to be taxed on the balance forgiven by your creditors. So see a tax counsellor before going for debt settlement. Nonetheless, debt settlement can be acceptable in select scenarios like when the account is delinquent and when the credit score already reflects this. As much as is possible though, it's best to have a look for other options if the credit score of someone can still be saved.
With a debt management program, the counseling company works side-by-side with the creditors to alleviate debt by reducing interests and stopping overlimit fees. They also work towards lengthening the repayment terms. In a debt management program, you'll also make monthly payments to the counseling company. The only difference is that your payments will be distributed to your lenders inside one week.
These are the major differences between a debt settlement program and a credit analysis service. If you are heavily in debt, consult your fiscal counsel for the proper course of action to take.
