A Tale of Two Consumers
Posted 3/7/2023 by Melissa W

Client A gets an official looking “ad” in the mail. The company knows about how much debt he has, and the letter makes big promises about how he can pay off his credit cards with no interest and for just half the amount owed. The fancy letter says that this “official” program is available to anyone with over $10,000 in debt, and all he must do is call, and the representatives at the Debt Settlement Company can make this magic happen. 

Client B has a friend that used Credit Counseling, and the friend shared how much she saved on interest while balancing her budget. The friend explained that it was hard work (not a magic wand) to dig out of debt, but that the lowered interest charges, one monthly payment, and the support of the credit counselor all helped her out immensely.  

Client A calls and talks to a representative at the Debt Settlement Company, as he is at his wits end with the credit card debt that he has paid on for years. After a conversation about all the positives of the program and a 32-page contract, he is on his way to being debt free. 

Client B calls and schedules an appointment to meet with a credit counselor for an appointment, as she is at the end of her rope with her credit card debt, medical bills, and collection accounts. After her hour-long appointment which covers her budget, debts, and how the program works, the pros & cons, a review of her creditor concessions, and a Debt Management Plan agreement, she is on her way to being debt free.

How will each program affect these consumers though? Will their road to debt freedom be the same? Will one have smooth sailing while the other has rough waters? The processes sound kind of similar, and for the average consumer, one may sound much better than the other. Here is some information to make an informed decision. 

Client A chose Debt Settlement. Here is a general explanation of how that works:
The Debt Settlement Company will require the consumer to stop paying his creditors and make payments into a savings account. Fees and interest charges will continue to add up on his debts, as payments are not being made, and the accounts are falling delinquent resulting in negative credit reporting. This process will cause the balances to increase until they are charged off.  Once an account has fallen severely delinquent, the Debt Settlement Company will reach out, and they will attempt to negotiate a settlement less than the full balance using the funds in the client’s savings account. This process can take a few years depending on debts owed. The fees associated with it are usually high. Depending on the local and state laws, they could be 20-25% of the enrolled debt, and that is paid to the for-profit Debt Settlement Company for their services. Income taxes will generally be owed on his discharged debt over a certain dollar amount. Not all creditors will settle on his outstanding debts. 

Client B chose Debt Management/Credit Counseling. Here is a general explanation of how that works.
The Credit Counseling Company will set up a repayment program for the consumer. This plan will have set scheduled payments that the creditors will accept based on her balances and individual creditor policies. In return for regular monthly payments through a Debt Management Plan, most of her creditors will offer interest rate concessions which will save her thousands on finance charges allowing her to pay off her debts sooner than on her own. Each month, she will make a payment to the Credit Counseling Company, the funds are put into a trust account for the benefit of the creditors and disbursed to creditors on a set monthly date. As long as the client makes her payments, the accounts stay current, and the creditors will continue to report as such. The client will continue to receive monthly statements from her creditors, so that she can review the progress of the plan. The fees paid to a non-profit credit counseling agency are generally low and based on the monthly payment to the creditors as well as the state the client lives in. This process will take 3-5 years depending on the amounts owed. There are no tax ramifications as full balances are paid back. The credit cards will be closed to further charges. Not all creditors work with credit counseling, but many do. 

Getting out of debt is hard work and, and it takes time. Being in debt is stressful, and some companies prey on that. Make an informed decision on debt relief. If something sounds too good to be true, read the fine print, ask questions, check online reviews and the local Better Business Bureau.