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While the United States economy suffers from the home mortgage crisis, credit card debt is bubbling as the next witch’s brew ready to bring its own potent poison to the table. Credit card debt has been spiraling out of control for years, but the situation has worsened as other forms of credit have dried up. Home equity loans are no longer a ready cash cow for Americans looking to acquire, and rising unemployment rates have more people tapping credit cards to the limit.
Credit Counseling & Debt Settlement
It’s no surprise then that organizations that help consumers resolve credit card debt are busy serving thousands of new customers. There are two popular ways to solve credit card debt issues – credit counseling and debt settlement.
Each helps clients by educating them on ways to get out of debt and stay that way, but the approaches are vastly different. Credit counseling aims to pay off the debt in full by negotiating lower interest rates, while debt settlement companies offer faster debt repayment by negotiating reductions in the outstanding amount. Key differences include:
Credit Counseling:
1. Negotiate a lower interest rate, pay off the principal balance in full
2. The client pays a monthly amount to the counseling service, which pays the creditors
3. Monthly payments are usually high
4. Compensation by fees from lenders, 4-15%
5. More BBB Complaints
6. 83.9% of BBB complaints were resolved
7. 21-26% reported success rate
8. Professional Associations: National Federation for Consumer Counseling (NFCC) and Association of Independent Consumer Credit Counseling Agencies (AICCCA)
Debt Settlement:
1. Negotiate a reduced balance, then pay them off in full
2. Customer creates separate savings account, pays his bills from it
3. Monthly payments are usually low
4. Compensation by customers directly, 10-15%
5. Fewer BBB complaints
6. 91.5% of BBB complaints were resolved
7. 40-55% reported success rate
8. Professional Association: The Association of Settlement Companies
different approaches to different problems
But the biggest difference is that these two approaches are designed to help people with different levels of debt. Consumers with credit card debt of less than $7,500 probably shouldn’t consider debt settlement. In such cases, credit counseling or a do it yourself program would be a better approach.
But those who have accumulated very high levels of credit card debt may find debt settlement the best way to clear the decks and regain control of their lives. Companies subscribing to the standards of the Association of Settlement Companies (TASC) work towards paying off all balances in 12-36 months.
a necessary alternative to bankruptcy
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ended personal bankruptcy for most Americans. When this option was taken off the table, the contemporary consumer lending industry began to reshape itself to meet the needs of consumers with exceptionally high levels of unsecured debt.
Let’s be clear about this: Debt settlement isn’t for everyone, but it does provide a much-needed alternative to bankruptcy for those who, for whatever reason, can’t meet their obligations. Those who cannot afford even the minimum monthly payments on credit card debts are unlikely to be successful with a credit counseling solution that demands higher monthly payments.
criticism and comparison
For an industry that has so much to offer to the public, debt settlement has been the subject of much criticism lately mainly for two reasons: 1) The industry is new (less than five years old) and well is not understood; and 2) a few bad companies have tarnished the reputation of most legitimate, highly ethical companies. The industry is fixing both problems by establishing a high public profile and weeding out the bad apples to increase awareness and understanding.
The credit counseling industry, led by NFCC, is not at all reluctant to put a stone in debt settlement, perhaps even questioning the very right of the industry to exist. But a quick glance at the comparison above should alert readers to several concerns about credit counseling. Two in particular stand out.
The first issue is who pays the credit counseling agencies. Some have noticed that they appear to be well behaved collection agencies for card companies, as creditors pay them a fee (which is not the case with debt settlement companies).
Then there is the matter of effectiveness. The credit counseling success rate of 21-26% lags far behind the 40-50% reported for debt settlement. If your financial future was at stake, which would you choose?
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