Getting out of debt is a difficult process. While debt consolidation can help streamline your bills into one monthly payment, sometimes you need professional help.
Debt settlement companies and credit counseling services are two popular options to help consumers climb out of debt. But they operate quite differently and have different requirements, fee structures and drawbacks.
See if debt relief is right for you
What is debt relief?
Debt relief (or debt settlement) companies can negotiate with your creditors to lower your balances.
Typically, a minimum debt load of $7,500 or $10,000 is required and only unsecured debt, not backed by collateral (like a car or house), is eligible. Most companies can't negotiate back taxes, but there are special tax relief companies that can.
Debt relief companies can only negotiate unsecured debts, such as credit cards, medical bills, personal loans and private student loans. Secured debt, such as a mortgage or car loan, isn't eligible.
Once enrolled in a debt relief plan, clients are instructed to stop making payments to their creditors and direct those funds to a special account. Once enough has been set aside, the company will use those funds to negotiate settlements.
Your creditors are likely to keep reporting late payments during that phase, so interest and late fees will continue to pile up and your credit score will take a big hit. (Your lender may also pursue legal action.)
In return, the average settlement amount is about 50% of the balance owed, according to the American Association for Debt Resolution (AADR). After they take their fee — generally between 15% and 25% of the amount enrolled — clients save an average of 20% to %30.
Debt relief companies also claim they can help clients get out of debt in 24 to 48 months, much faster than making regular minimum payments on high-interest debts would.
New Era Debt Solutions and National Debt Relief are two of our top debt relief companies, based on customer service, debt requirements nad
New Era Debt Solutions
Minimum debt
$10,000
Fees
Settlement fee is 14% to 23% of enrolled debt.
Availability
Available nationwide except for Iowa, Maine and Oregon
Highlights
Clients average 28 months to complete their debt settlement program, according to New Era, faster than many competitors.
National Debt Relief
Cost
15% to 25% of enrolled debt
Highlights
National Debt Relief has been in business since 2009, and has helped hundreds of thousands of people get out of debt. While National Debt Relief won't be a fit for people who owe less than $10,000, it can be a good option for those with large debts.
App available
No
Read our National Debt Relief review
Pros and cons of debt relief
- Consolidates multiple debts into one streamlined payment
- Can cut your total debt by as much as 50%
- Can allow you to pay off your debts within 2 to 4 years
- Only applies to unsecured debt
- Minimum of $7,500 debt to enroll
- Creditors may reject the settlement offer
- Fees can be as much as 25% of your enrolled debt
- Your credit score will take a major hit
- Settled debt is usually taxed as income
What is credit counseling?
Credit counseling services are typically nonprofit, though they still charge for some services. A credit counselor will work with a client to draft a debt management plan that will hopefully lower interest rates and eliminate some fees.
From there, the client will make one monthly payment to the service, which will send funds to creditors on their behalf.
Unlike debt settlement, counseling is intended to pay off what you borrowed in full. That means you'll avoid some of the negative effects on your credit, but your existing balance won't be impacted.
Clients typically pay off their debts in three to five years, compared to two to four years with a debt relief firm.
Credit counseling tends to cost less than debt relief, although prices vary by state. In California, monthly fees are capped at 8% or $35 (whichever is smaller) plus an educational fee of $50.
A reputable service will offer a free advice session and put its fees in writing. Check with your state attorney general's office or consumer protection agency to review its record.
The Financial Counseling Association of America and The National Foundation for Credit Counseling both have reasonable rates and positive client feedback.
Pros and cons of credit counseling
- Fees are lower than debt relief
- Less impact on your credit score
- No set debt minimum
- Won't lower your existing balance, just help with interest rate and fees
- You must close enrolled accounts, which can impact your credit utilization rate.
- DMP can take up to five years, longer than debt relief
- Only applies to unsecured debt
Debt settlement vs. credit counseling
If you're sinking into debt, both debt relief companies and credit counseling services can be a lifeline. But they provide different services, have different fees and come with different pros and cons.
While debt relief programs require a minimum balance of either $7,500 or $10,000 , there is no strict minimum debt amount for credit counseling. (Some agencies may prefer at least $1,000 to $3,000 to structure a debt management plan, however.)
Credit counseling provides a debt management plan that could lower your interest rate and remove some fees. But it won't tackle your existing balance the way debt relief would.
Working with a debt relief company can result in your debt load dropping by as much as 50% and your balances getting cleared faster. But the fees can reach 25% and the strategy can cause major damage to your credit score.
Credit counseling may make more sense if you have a reliable income and are making at least minimum payments on your credit cards and other bills, but need help chipping away at your balance.
Debt relief is a more drastic option, but it could be the better choice if you're unable to make minimum payments or have already defaulted.
FAQs
Is debt relief legit?
While there are scammers, debt relief is a legitimate practice. The companies on our best list have all been in business since at least 2009 and are all accredited by the Association for Consumer Debt Relief.
Does credit counseling hurt your credit?
Credit counseling typically avoids the major hit to your credit score that debt relief entails. But you'll still need to close enrolled accounts, which could raise your credit utilization rate and result in a smaller ding.
Is credit counseling better than debt settlement?
While credit counseling is a less drastic approach to addressing debt, you still have to repay the full amount and a debt management plan can take longer than debt relief to pay off your bills.
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