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Common Concerns & Questions About Bankruptcy

How do debt relief companies, credit counselors work? (Part 1)

| Mar 22, 2018 | Chapter 13 |

Tyler residents burdened with debt and seeking some debt relief have a number of options. Credit counseling (usually offered by a non-profit organization) is one common option; another is debt settlement through a private company. The two are similar, which may leave consumers wondering: just what is the difference between debt settlement and credit counseling services?

First, let’s look at credit counseling organizations. As the name suggests, these entities offer information on money management, including how to handle significant debt. Consumers can meet with a credit counselor for one or more counseling sessions. A credit counseling organization will typically offer a debt management plan as one way to get ahead on your debts.

A debt management plan allows consumers to make just one regular payment instead of multiple payments across credit cards, loans, accounts and other debts. The one payment goes to the credit counseling organization, and will typically be lower than before the debt management plan. The organization in turn will make the multiple payments on the consumer’s behalf, usually at lower interest rates or over longer terms that it negotiates directly with your creditors.

A credit counseling program may be free, or it may include fees in the payments that you make to the organization. In addition, while you may pay a lower monthly amount than you otherwise would have, you’ll still have to pay off the full balance of your debt, unlike with Chapter 13 bankruptcy. Under Chapter 13, monthly payments are made for a certain period of time, with any remaining debt discharged completely.

Debt relief companies also offer a way to reduce the amount you owe. We’ll look at these more closely in a follow-up post. The information is presented as general background information only, and is not to be taken as specific legal advice.

Source: Consumer Financial Protection Bureau, “What’s the difference between a credit counselor and a debt settlement or debt relief company?,” accessed on March 17, 2018