Five Differences Between Debt Reduction and Credit Counseling

More and more consumers today find themselves in the uncomfortable 
situation of only being able to afford the minimum 
Payments on their credit cards. Or, even worse, not being able to 
afford even the minimum payments. In today’s world, it is 
often easy to get in over your head and find yourself spending more 
than you make. It seems that everything is going up but 
wages, and it is all too easy to fall behind.

Many of these desperate consumers find themselves contemplating a 
bankruptcy filing, but bankruptcy can carry a legacy you 
will have to live with for years. A bankruptcy filing will stay on your 
record for a minimum of seven years, and you may find
it difficult or impossible to obtain necessary credit in the interim.

Fortunately, there are alternatives to filing bankruptcy, even for 
consumers who owe thousands or even tens of thousands of 
dollars to various banks, credit cards and other creditors. Many people 
ask whether it is best to go with a debt reduction 
program or enroll in a credit counseling program. While there are some 
similarities between these two types of programs, 
there are some important differences to consider as well.  Let us 
consider the five most important differences between debt
reduction and credit counseling.

1. Did you know that most credit counseling programs will require that 
you close all of your credit accounts? The few 
exceptions to this requirement include accounts that are required for 
business needs, accounts with very small balances and 
accounts on which there are cosigners who are not applying for credit 
counseling services. Debt reduction services, on the 
other hand, do not require that all credit accounts be closed.  This 
can make it much easier to keep a credit card for 
emergency and convenience purposes.

2. Credit counseling services typically take longer to complete than 
debt reduction services. The average length of time to 
liquidate debt through a credit counseling service is 5 years. Unlike 
credit counseling, debt reduction programs can often 
allow consumers to retire their debts in less than a year.

3. Cost savings in the form of reduced payments is another important 
advantage of debt reduction programs. While credit 
counseling programs typically require that the entire amount of the 
debt be repaid, debt reduction programs can be negotiated
to allow the consumer to repay only a portion of what is owed. Most 
creditors are willing to work with consumers enrolled in
debt reduction programs and that includes accepting a lower repayment 
amount. Settlement amounts can range anywhere from 
20% to 60% of the amount owed, with the industry average being around 
50%.

4. Your credit score is also affected in different ways by credit 
counseling programs versus debt reduction programs. 
Generally, credit-reporting agencies will re-age the accounts of 
consumers enrolled in credit counseling services after three
payments have been made. With a debt reduction settlement, the status 
of the account does not change. If the account is 
current, it will remain current. If it is past due, it will remain so.  
It is also good to remember that with a debt 
reduction agreement the creditor will report that the account has been 
“settled in full” or similar wording, at the 
conclusion of the debt reduction program.

5. The final difference between debt reduction programs and credit 
counseling is the bargaining power enjoyed by the consumer.
Credit counseling programs rely on the submission of a debt repayment 
proposal which the creditors are free to accept or 
reject as they see fit. With a debt reduction program, however, all 
creditors are contacted immediately to inform them of the
hardship situation and the desire to resolve it through a negotiated 
debt reduction agreement.