Is credit counseling and debt consolidation/relief synonymous?

For those who are trying to improve their financial situations, say, in order to be able to purchase a home, they’ve undoubtedly heard the radio ads or have seen the television ads for debt consolidation companies. Or perhaps a cursory Internet search they conducted brought them across credit counseling organizations. They sound the same, right? They both ultimately work to help improve clients’ financial situations so they must be the same. Well…not quite.

It’s true that, in general terms, the goal for both types of organizations is similar. But there are a number of significant distinctions between the two, and it’s to a person’s benefit to know those distinctions before working with either type of organization.

Paying for services

It’s important to note that most credit counseling organizations are non-profit. Many of the services and information they provide are free, but they will charge fees for some services. Debt relief companies, by comparison, are for-profit companies that charge fees. Generally, these companies cannot charge fees until services have been rendered.

Negotiations

As anyone has probably heard in the ads, debt relief companies can offer the possibility of negotiating with creditors or debt collectors to reduce the amount of money they owe. The drawback is that some creditors will not negotiate with certain debt relief companies, so it’s important for clients to get that kind of information upfront. Debt relief companies also often don’t have standing agreements with creditors. They negotiate individually for their clients.

Credit counselors negotiate differently. They don’t typically negotiate a settlement for a lower amount. They negotiate payment plans with creditors that often avoid debt collection and the accumulation of late fees. The monthly payments are less than the original amount and the counselor can negotiate the time for repayment to be longer and can even reduce the interest rate. The client pays one payment each month to a credit counselor, which then disburses payments to creditors.

Another very important distinction between credit counseling and debt relief/settlement is the latter often instructs clients to stop payments to creditors while they negotiate a settlement. That can carry significant risk for a client because it can damage their credit score and perhaps make them subject to a lawsuit. Credit counselors do not advise clients to stop making payments to creditors.

Finally, debt settlement/relief companies are subject to certain rules from the Federal Trade Commission. According to the Consumer Financial Protection Bureau, these companies cannot charge a client until they meet three requirements:

• They have reached a successful result, meaning the company has successfully settled, reduced or made changes that benefit their client, such as a change in terms.
• There must be an agreement between the client and the client’s creditor based on the negotiations made by the debt settlement company.
• The client must make one payment to the creditor based on the agreement negotiated by the debt settlement company.

As the CFPB states, clients should read their contacts with their debt settlement company carefully so they are fully aware of how the fees to the company are structured and calculated.