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Common Concerns & Questions About Bankruptcy

How do debt relief companies, credit counselors work? (Part 2)

| Mar 29, 2018 | Chapter 13 |

We’ll pick up this week where we left off from our discussion of debt relief companies and credit counseling services. Tyler residents searching for debt relief options are likely to encounter these two types of entities, and it’s important to understand the difference between the two as well as their limitations.

Unlike a credit counseling program, which will offer financial advice and may be able to help you reduce your monthly payments (but not the total amount you owe), a debt relief or debt settlement company will offer to negotiate with your creditors to reduce your actual debt in exchange for a lump-sum payment by you for the remaining balance. You may need to save up a certain amount of funds in a dedicated account first. Then, the debt relief company will use the funds in that account to pay off the reduced balances that it negotiates on your behalf.

Importantly, the company will charge you a fee for this service. Some may even try to charge you before negotiating a settlement, a practice which federal regulations prohibit. And there’s no guarantee that your creditors will be any more receptive to negotiating with a debt settlement company than they would be to negotiating with you directly. Consumers should research their options carefully before signing up with a debt relief company.

Another point to keep in mind is that neither credit counselors nor debt relief companies can provide the kind of fresh financial start that comes with, for instance, a Chapter 13 bankruptcy. Simply filing for Chapter 13 provides an automatic stay, protecting you from debt collection tactics. After completing a payment plan, your remaining unsecured debt will be discharged completely. This information is not intended as specific legal advice, but as general background on bankruptcy and debt relief.

Source: Consumer Financial Protection Bureau, “What’s the difference between a credit counselor and a debt settlement or debt relief company?,” accessed on March 23, 2018