Counseling vs Debt Settlement - Which One is Optimal For You

Have you ever reflected over whether counseling or debt settlement is the best option for your? In this article you will get the answer on that question and be able to start digging yourself out of the debt. But let us begin by discussing the possible causes behind your credit card debt.

There are times when credit card debt can become more than you can bear. For some people, the problem is a long time habit of spending more than they could afford. For years, credit was easily available to almost anyone.

If one credit card balance reached its limit, it was easy to obtain another credit account and keep shopping. The monthly payments were only 1-2% of the balance plus interest charges. As long as payments were low and APR was 10-12%, debt could be managed by most account holders.

Using Credit Recklessly

The growing problem with credit card debt in recent years has two causes. First, those who used credit recklessly found their interest rates double or even tripled in one month's time and the new higher monthly payments were beyond their ability to pay.

At the same time, credit lending slowed substantially and lender were reluctant to approve new accounts except for those people with very good credit ratings.

Using Credit Wisely

The second problem with credit debt occurred for those who had used credit wisely in the past. They also found their APR being raised by financial institutions and often the limits on the accounts were lowered. Suddenly, consumers were faced with much high payment on accounts that could not be used for further purchases.

A rising unemployment rate contributed to the problem and even those who have kept their jobs have found salaries and hours often cut. Budgeting on a reduced income or trying to pay bills after a job loss has caused tens of thousands of people to fall behind in paying their credit debt.

Counseling Services

Counseling has helped many reduce or eliminate their debt. A good credit counselor will go over your budget with you and will help you arrive at a financial plan you can live with each month.

The counselor will contact your creditors and negotiate with them to reduce interest rates and monthly payments to a level that you will be able to pay each month.

Once the negotiations are completed, you will pay one payment each month to the credit counseling service. The counseling service will then pay the agreed upon payments to each of your creditors each month.

It is important to understand that counseling services are not closely regulated. There are some excellent counseling services that are non-profit (though you will still be charged fees for the service) while others operate on a for profit basis.

Unfortunately, there are also scammers in the credit counseling field. Check with the Better Business Bureau, search online for comments about the service you are considering and ask friends for advice. Your local bank may be able to provide a list of reputable counseling services as may the local Chamber of Commerce.

Debt Settlement

If you have some funds at your disposal but realize you will not be able to continue making your current monthly payments, you may consider debt settlement.

There are attorneys and some agencies that provide debt settlement services for a fee but this is an option you can pursue directly with your credit card lenders.

The ability to negotiate a debt settlement will depend on your personal circumstances now and the expectations you have of future income.

Debt settlement is just like it sounds. If your lender is convinced that you have no ability now or in the near future to pay off your credit debt in full, he may be willing to settle for a lesser amount.

From the lender's standpoint, a settlement agreement may be more desirable than losing the entire amount of the debt should you be forced to file for bankruptcy protection. Bankruptcy would totally eliminate the debt and settlement would at least provide some funds to the lender.

For your part, you would need to be able to pay the settlement amount within 60 days at the most. Thus, settlement is an option only if you have some funds available to pay off the negotiated debt.

Conclusion

Understanding the different procedures and requirements of counseling vs. debt settlement will help you decide which path to take. If you are overwhelmed with credit card debt you cannot pay, these are options you should consider.