The good news is that Americans who have debt have multiple options available to get rid of it. The challenge is finding the best strategy for you based on your financial situation. The first step in that process is learning each potential solution’s pros, cons, and requirements.

Two popular strategies many people end up considering are debt settlement and credit counseling, both of which have very different goals and processes.

When to Consider Credit Counseling

Credit counseling involves meeting with a professional who can go over your household budget and make suggestions. Depending on your situation, he or she may enroll you right away in a debt management plan (DMP), which is a form of credit card consolidation. This informational meeting is usually free.

Some people pursue credit counseling as a requirement preceding bankruptcy, but many others meet with a credit counselor early enough to avoid bankruptcy and get their debt situation back on track with the least damage possible.

You may be a good candidate for credit counseling if any of these services would benefit you:

  • Budgeting advice: Credit counseling agencies usually offer free half-hour or hour-long sessions in which a professional looks over your budget in terms of income and expenditures, then offers personalized to help you get closer to your goals.
  • Debt management: A more structured consumer credit counseling programs is a debt management plan (DMP), in which you’ll start making a monthly payment to the agency, trusting it to disburse your funds to creditors. DMPs may earn you better interest rates and canceled fees, plus a solid timeline for repayment.
  • Bankruptcy counseling: This process consists of two financial information sessions that occur at the beginning and end of bankruptcy filing.
  • Student loan counseling: Borrowers struggling with educational debt can go over repayment options with a counselor and sometimes even communicate with lenders through the agency.
  • Housing counseling: Renters and homeowners alike can get advice on managing housing costs.

Not every credit counseling agency offers every service listed here. That underscores the importance of finding the right consumer credit counseling program for you.

When to Consider Debt Settlement

Debt settlement is a potential alternative to bankruptcy for borrowers who have fallen behind on payments due to an inability to pay off debt. Such inability is often due to job loss or a medical emergency.

The goal of debt settlement is to help you resolve your debts for significantly less than you owe. You can do this on your own or work with an experienced debt settlement firm. Either way, you’ll need to have on hand a percentage of your original debt to use as a bargaining chip for getting your balance reduced.

Is Credit Counseling or Debt Settlement Right for You?

According to one expert for Investopedia, consumer credit counseling is an option for people with about $2,500 to $15,000 in debt who could benefit from lower interest rates to make their monthly payments more manageable.

Debt settlement, however, may be a more realistic option for consumers with heavy debt loads ($15,000 or more). Such consumers may need their principal debt slashed in order to pay it off.

Whether you go with credit counseling, debt settlement or another relief option depends on how much debt you have, how far behind you are on payments, and what it would take to realistically allow you to tackle what you owe.

 

 

 

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