Late night commercials promising a “stimulus relief” from your debt? Official-looking fliers in the mail offering to settle debts for pennies on the dollar? There are some things you will want to consider before signing contracts with companies offering these arrangements.
Debt Settlement:
- This is an agreement between you and a creditor to pay only a portion of the full amount of the debt you owe and to call the debt “settled”
- Usually this amount is paid in one lump sum or in up to 4 larger monthly payments.
- Remember, you NEVER have to pay anyone a fee to make this arrangement with your creditors. A legitimate non-profit credit counseling agency will tell you how to make this arrangement without charging you a dime.
- Careful in hiring any company to help you with this – you will pay their fee up front before your creditors get any money and your creditors may sue you as a result.
- Always get the agreement in writing before making the lump sum payment to the creditor.
- The amount of money that is forgiven is processed by the IRS as income to you.
- Settling a debt is not seen as favorable on your credit report, but if you’ve been having trouble making payments as agreed it may still be a relief to you to get the amount fully paid.
Debt Management:
- Offered through credit counseling agencies – facilitates an arrangement between you and your creditors which is voluntary for both you and the creditor
- Typically all your unsecured debt is enrolled in the plan
- You pay the full amount of debt that you owe over 60 months or less
- You don’t get to determine the payment, but through a financial analysis you can see how it is affordable. If the payment isn’t affordable, usually the Debt Management Plan isn’t an option.
- Creditors will usually offer much more favorable interest rates on a Debt Management Plan and qualified enrollees can save tens of thousands in interest.
The major difference is that when a third party is involved, a Debt Management Plan is made in cooperation with creditors. Debt Settlement companies usually alienate the creditors – which can result in lawsuits for you.
Caution: Some companies offering to facilitate debt settlement agreements with your creditors use predatory and deceptive practices – sometimes posing as “Consumer Credit Counseling Service.” Using your local 211 service will help you connect with the local non-profit agency that is right for you. You can always contact Consumer Credit Counseling Service of Central Oklahoma (Cccsok.org) for more guidance.
