Debt Reduction vs. Credit Counseling

More consumers than ever are finding themselves in the unenviable position of no longer being able to make the payments on their obligations anymore.  In a world where credit offers are received daily, it’s easy to get overwhelmed and ruin your well-planned budget.  As an alternative to bankruptcy, more consumers are turning to debt reduction and credit counseling programs, but what are the differences?

1.    Most credit counseling programs insist on having all accounts closed before they will consider taking on a customer.  The few exceptions are accounts needed for business purposes or accounts with very small balances.  Debt reduction services usually allow most accounts to be kept open for future use.
2.    Credit counseling usually takes longer to complete than debt reduction.  The average time spent in credit counseling is five years.  While most debt reduction services can liquidate your debts in less than a year.
3.    The amount of money saved on reduced payments is another huge advantage of debt reduction programs.  Credit counseling requires the entire debt to be paid while debt reduction works with the creditors to reduce the actual amount owed.
4.    Credit scores can be affected in very different ways with either a debt reduction or a credit counseling service.  Credit counseling does what is called a “re-aging” of your accounts.  In other words once a few payments are made, the status on the credit report will be changed to show as current.  With debt reduction the status of the debt is kept the same.  If it’s past due at the beginning of the program, it will remain that way.  Once the program is complete it will reflect as “settled in full” but the past negative history will remain.
5.    The final biggest difference is the bargaining power the consumer gets.  Credit counseling offers a debt repayment plan but the creditor is free to reject it or accept it at their will.  With a debt reduction program, all creditors are contacted and informed of the hardship and the request that some form of agreement must be reached.

Written by on June 24th, 2009 with no comments.
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