Debt Settlement vs Credit Counseling. To enroll or not enroll. That is the question.
If you have found yourself with a heap of credit card debt, then perhaps you have recently learned about debt relief programs like debt settlement. And perhaps you have also discovered the ins and outs of credit counseling. But you are still uncertain which one is best for you.
If you are smart enough to speak to both a Debt Settlement company and a Credit Counseling agency, then you have heard the sales pitch about each service.
The Debt Settlement Pitch
- One low monthly payment
- Pay back only a portion of what you owe (50%)
- Debt Free in just 36 months
The Credit Counseling Pitch
- Lower Interest Rates
- Pay back 100% of what you owe
- Debt Free in just 60 months
But let’s dig deeper into each service to get a complete understanding. To do so, let’s use an example of someone with 8 different credit cards and a total debt of $32,000. And let’s name this person, Jane Debt. Here are Jane’s creditors sorted from smallest balance to highest:
| Creditor | Balance | Payment Amount | APR% | Finance Charge |
| Capital One | $1,000 | $30 | 27.99% | $23.33 |
| Synchrony Bank | $1,500 | $45 | 24.39% | $30.49 |
| Comenity Bank | $2,000 | $60 | 26.42% | $44.03 |
| Discover | $2,500 | $75 | 29.99% | $62.48 |
| Citibank | $3,000 | $90 | 22.79% | $56.98 |
| American Express | $3,500 | $105 | 24.99% | $72.89 |
| Bank of America | $4,000 | $120 | 27.99% | $93.30 |
| Chase | $14,500 | $435 | 26.24% | $317.07 |
|
Total |
$32,000 | $960 | 26.27% | $700.55 |
To provide some more details, Jane can barely afford to make her minimum payments. She lives paycheck to paycheck but somehow stays current with her payments. Her credit score is only 650 due to most of her balances being at or near the credit limits. Her credit card payments add up to $960 every month. But $700 of that goes toward interest, leaving only $260 making a tiny dent to the principal.
Jane is frustrated about her situation. Continuing at this path would keep her in debt forever. The credit card companies refuse to lower their interest rates or provide payment relief. She’s been denied debt consolidation loans twice in the last 6 months. She is ready to make a change. And that change will be either Credit Counseling or Debt Settlement.
Let’s present more specific, hypothetical benefits of each plan for Jane.
Credit Counseling vs Debt Settlement Comparison
| Debt Settlement | Credit Counseling | |
| Payment Amount | $578 | $724 |
| Months to Payoff | 36 | 54 |
| Total Cost | $20,800 | $39,109 |
| Total Fees Paid | $8,000 | $1,890 |
| Taxable Income Amount | $19,200 | $- |
| Credit Effect | Negative, Severe | Neutral |
| New APR % | N/A | 6.78% |
Tale of the Tape: Who wins the battle?
Debt Settlement vs Credit Counseling
Payment Amount: Advantage goes to Debt Settlement. The payment for Credit Counseling will typically be higher than debt settlement. Mainly because you are only paying half of your debt back.
Total Fees Paid: Advantage goes to Credit Counseling. Debt Settlement companies are for profit. Jane can expect a Debt Settlement company to charge about 15% of her total debt. On the contrary, Credit Counseling agencies are nonprofit. Hence the fees being a fraction of what debt settlement charges.
Months to Payoff: Advantage goes to Debt Settlement. Most Debt Settlement plans last about 36 months, but some can be extended under certain circumstances. The average credit counseling plan takes about 54 months to complete. Some creditors offer hardship plans that can extend the plan to 72 months.
Credit Effect: Advantage goes to Credit Counseling. With Debt Settlement, Jane needs to starve her creditors of payments. Her credit score will definitely decline in the first year on the settlement program. On the contrary, payments will be made monthly on the Credit Counseling program. As long as Jane makes payments on time to the Credit Counseling agency, her payment history should stay strong.
Timeline of Each Debt Relief Program: Debt Settlement vs Debt Management Program
Let’s keep the shovels out and continue digging into these programs. Now we’ll focus on the timeline. Find out what happens a few months into each program, then after a year and finally at the end of each program.
Month 1
30 Days Into Each Program
Debt Settlement
Jane made one payment of $578 into her Debt Settlement Plan. The great news is that this amount is enough to settle her Capital One account. The bad news is that she isn’t far enough behind for them to settle the balance yet. She needs to let her accounts fall another 5 months behind. All accounts become thirty days delinquent. Jane’s credit score takes a big hit. It drops from 650 to 575.
The $578 sits in a separate account that the Debt Settlement company set up for her. Meanwhile, her creditors tack on finance charges and a $40 late fee on each account. The $32,000 debt amount increases to $33,020. $700 in finance charges plus $320 in late fees.
Credit Counseling
Jane made one payment of $724 into her Debt Management Plan. All funds minus a $35 monthly fee, got disbursed to her creditors. Jane still receives statements from her creditors and verifies payments posting to her accounts. The statements now show lower interest rates on all of her accounts. Including her largest balance, Chase, showing a 6% APR. Her average interest rate is 6.78%
Jane sees that a couple payments arrived 3-5 days after her due date. But she confirms her accounts are not being reported late to the credit bureaus. Her accounts are showing “Closed” on her credit report. Because of this, her credit score dropped. It lowers from 650 to 625.
Month 3
90 Days Into Each Program
Debt Settlement
Jane’s anxiety builds up as all accounts fall 90 days behind. This is unchartered territory for her as she has never been late with payments. Some creditors are calling her multiple times each day. Her Debt Settlement company assures her that everything is going as planned.
Additional finance charges and fees have increased the total balance to $35,240. Jane’s three payments of $578 sit in her trust account. It’s still too early for a settlement to occur.
Credit Counseling
Jane feels confident about her decision about joining a Debt Management Program. She has made three monthly payments total $2,172. She’s happy to see that her balances have decreased $1,533 so far. Her new total debt comes out to $30,466.
All creditors have accepted the terms. Her statements show she’s up to date with all payments. As a result, her anxiety about debt has disappeared. She now has time to focus on her career and family.
Month 6
180 Days Into Each Program
Debt Settlement
All accounts have charged off and some of them have gone to collections. Jane has made six payments totaling $3,468. Capital One, Synchrony and Comenity all were successfully settled and paid off! Now she has $858 sitting in her trust account.
Despite the good news about three of her accounts, the other five creditors want money today! Unfortunately, Jane doesn’t have enough saved up to settle another account. She has received two letters with threats of lawsuits if she doesn’t pay her debt soon.
Credit Counseling
Payments continue to get disbursed monthly. All accounts are up to date. As a result, Jane continues to see her balances decrease. With Jane’s hard work in making on time payments, her total balance has diminished to $28,907.
Her credit score has climbed back up to where it started at 650. She trusts her credit counseling agency and feels confident about her financial situation improving.
Year 1
12 Months Into Each Program
Debt Settlement
Discover and Citibank settle for 40% of the original balance. That brings the total to five creditors paid off. But three of the largest balance creditors still need to be paid. Bank of America threatens to garnish wages.
Jan receives some tax forms in the mail. Capital One, Synchrony and Comenity claim that she owes income taxes on the forgiven debt amounts
Credit Counseling
Jane receives a new credit card offer in the mail therefore she thinks her credit score may have improved. She reluctantly declines the offers as she is laser focused on getting out of debt.
She checks her credit score and sees improvement. Her score climbs to 710. Jane thinks she will need to finance a vehicle in the next year.
End of Each Program
Debt Settlement
All accounts have been settled. Congrats to Jane! She’s no longer a slave to her lenders. And the nagging collection efforts from her creditors have ceased.
Unfortunately, her payment history going back the last three years looks and smells like a dumpster. Nobody wants to loan her money since she didn’t pay it back in full. Perhaps if someone does, the APR will come with a high price tag.
Credit Counseling
Jane made her final payment last month! The statements all show $0.00 in the balance column. It was long journey but would have been a decade longer without Credit Counseling.
Credit Card offers are flooding Jane’s Inbox. But she’s learned her lesson and decides to use her debit card from here on out. No more spending money she doesn’t have.
Debt Relief Program Success Rates: Debt Settlement vs Credit Counseling
For one final comparison, we’ll dig into the success rates of each program. How many people successfully complete a Debt Settlement Program? And what is the success rate of Credit Counseling?
Neither of the two services sniff anywhere close to A+ range when it comes to success rates. After all, clients seeking debt relief are already experiencing a financial hardship. One minor blow to their income or expenses can send clients to the cancellation department.
Studies conducted by the American Fair Credit Council (AFCC) indicate that, on average, approximately 55% of accounts enrolled in debt settlement programs are successfully settled. That means in Jane Debt’s case, she’d be lucky to get 5 of her 8 accounts settled
More specifically, within the first 3 years of starting a debt settlement program, AFCC data reveals:
- 74% of clients settle at least one account.
- 59% settle at least half of their accounts.
- 43% settle at least 75% of their accounts.
- 23% have all of their enrolled accounts settled.
On the contrary, Debt Management Plans see a lot more success. Data on DebtWave clients shows that approximately 68% of their clients complete their program. In other words, about 2 out of 3 clients paid their debt in full while on the program. Quite a success rate compared to Debt Settlement.
Why is Credit Counseling More Successful Than Debt Settlement?
One of the main reason Credit Counseling clients find more success is quicker results. During the first month of the program, proposals get accepted and rates get lowered. Creditor statements showing the lower APR and lower payments act as visual proof for clients.
However, waiting 5 years to pay off their debt seems like a lifetime for some people. Some DMP clients can get discouraged. For example, look at Jane Debt’s case. After the first year, the total debt only decreased $3,000. Some clients’ expectations can be way off.
On the other hand, Debt Settlement clients see negative results at the onset. Their accounts fall further behind. Creditors might start calling and statements show past due notices. All of these can be discouraging for someone already struggling with credit card debt.