Debt Settlement vs. Credit Counseling
October 29th, 2007 
If you’re in debt and you’ve done some searching for solutions, you’ve probably heard of these terms before: Debt Settlement and Credit Counseling (Debt Repayment Plan). While these two terms may have similar connotations, there are major differences.
Debt settlement is also referred to as debt negotation. It is the act of hiring a debt settlement company to negotiate with a creditor to achieve a lower pay off balance. This option can seem attractive because you’d have a smaller amount to pay off, but in the long run, you may find that it does more harm than good.
Before you can settle any debt, your account with the creditor(s) must get Charged-Off. In order to reach a Charge-Off status, a debt settlement company may require you to miss up to 6 months of payments. During this time, you may accrue late charges and be subject to harassing phone calls from creditors. Delinquent accounts can be reported for seven years from the date you were first delinquent. This means that a debt settlement will re-start the reporting clock on your credit report.
Once an agreement has been reached by your debt settlement company and the creditor, the delinquent information does not drop off your credit report. Instead, your account is labeled with a “Charged-Off Settled” Or “Paid-Settled”, neither of which is as good as a “Paid in Full” account. After debt settlement, it may be a few years before you see any unsecured credit approvals.
Debt repayment plans are typically offered through credit counseling organizations. In my opinion, this is the better alternative to eliminating your debt. While credit counselors do not negotiate for lower pay off amounts, they can however, help lower your interest rates, eliminate late and over-the-limit fees, and get you set up on an easy repayment plan. Through a debt repayment plan, a credit counseling agency would essentially be making monthly payments on your behalf to all your creditors. The only payment you need to make is one lump sum to the credit counseling service.
As long as you make on-time payments through your credit counselor, you should not incur any late charges or over-the-limit fees. Also, once you’ve completed the repayment plan, your account will be updated as “Paid In Full.” Some creditors may look at credit counseling as being negative on your credit report, but ultimately, it is easier to recover from a debt repayment plan than a debt settlement.
