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Identifying the best ways to settle debt

Pennsylvania residents may not be aware about the difference between credit counselors and debt settlement companies. While there are some similarities between the two, there are many differences as well. Understanding which option is the best to utilize when settling debt can be extremely important.

Credit counseling organizations typically do not negotiate payment amounts on existing debts. They can assist in lowering the amount of monthly payments. Often, they may be able to get the creditor to increase the amount of time the loan can be repaid and negotiate lower interest rates. Most credit counseling organizations are non-profit. However, they may charge a fee and take it out of the monthly payments. The organizations may provide counseling sessions to assist with money management and debt, provide educational materials and offer workshops. Counseling sessions typically last an hour, and the counselor may assist in organizing a debt management plan.

Debt settlement companies typically charge a fee to assist in arranging debt settlements with creditors. Often, they will offer to pay off debts with a lump sum less than the current amount owed. The companies may take a portion for every $100 they can get the creditor to agree to dismiss.

Credit counseling companies seek to arrange up-front negotiations with creditors to ensure collection efforts will not be taken. Debt management companies may instruct a client to stop making payments to creditors. Individuals should be cautious of this advice because collection efforts may continue, resulting in negative credit scores, additional fees and late penalties. This could potentially cause debts to increase, even if the debt settlement company successfully arranges to reduce the overall amount of debt. Because of the complications associated with debt management, a bankruptcy lawyer may be able to assist in helping a client identify the best method to settle debts.

Source: Consumer Financial Protection Bureau, "What's the difference between a credit counselor and a debt settlement company?", January 02, 2015

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