The Truth About Credit Card Debt Settlement (Part 2)

Posted On: April 16, 2009

By Curtis Arnold, CardRatings.com Reporter

Editor’s Note: This article is the second of a three-part series about debt settlement.

How is Settlement Different Than Credit Counseling?

Credit counseling and debt settlement are two completely different approaches. Most credit card companies work with credit counseling agencies. They will often encourage consumers who are having trouble paying their bills to enroll in a Debt Management Program (DMP) offered by a reputable credit counseling agency. That way, they get paid back 100% of the debt, plus interest. But most creditors don’t like to work with settlement companies (or at least don’t admit publicly working with them), and a few will even send consumers to litigation if they find out the borrower has hired a settlement firm.

If you can realistically afford to pay back your debt through credit counseling, it’s a better choice. Your credit rating will not be as severely affected as it will by settlement and, as long as you stick with your payment program, you’ll be out of debt in three to five years. But if a credit counseling agency can’t offer you affordable monthly payments, then settlement may be your only other choice.

Bankruptcy vs. Debt Settlement

If you file for bankruptcy you will either discharge (wipe out) most or all of your debts in a Chapter 7 case, or pay back part of your debts over several years in a Chapter 13 plan. Bankruptcy provides legal protection that settlement does not. Once you have filed, your creditors cannot sue you, or even contact you to collect while the bankruptcy is in progress.

Of course, in recent years it has become far more difficult for some debtors to qualify for this a Chapter 7 bankruptcy to wipe out the majority of their debts. Some consumers are forced to file Chapter 13 bankruptcy, instead, and make court-ordered payments for the next five years. Or they may have to give up assets to help satisfy the debt.

It’s always a good idea to talk with a bankruptcy attorney to find out what your options are. Visit Nacba.org or ABI-world.org to find a consumer bankruptcy attorney in your area.

How Will Debt Negotiation Affect My Credit?

A settlement will negatively impact your credit rating. Overall, settlement is similar to bankruptcy as far as your credit is concerned. That’s because you will have to stop making your payments, and you may even have to allow debts to go into collections before creditors will negotiate. However, unlike bankruptcy, debt settlement will never appear in the public record. And when you are out of debt, you can begin to rebuild your credit rating.

For more help deciding if debt settlement is the best option for you, check out the Consumer Recovery Network. You may also want to review Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts, by Gerri Detweiler and Mary Reed, for advice on how to deal with unfair collection tactics.

If you are interested in the self-help approach, you can find tips at ZipDebt.com. On a related note, if you have been unsuccessful at negotiating a lower rate on your existing credit cards, you might want to consider shopping for a new low rate credit card. As a reminder, you can compare low credit cards on CardRatings.com!

This article was written by Curtis Arnold, a nationally recognized consumer educator and advocate. Curtis has been educating consumers about credit cards since 1998. He is regularly interviewed and quoted by respected members of the national press regarding consumer credit issues. His new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line is available now! Order online and receive up to a 32% discount.

CardRatings.com is the most comprehensive source for comparing credit card offers. CardRatings.com is pleased to offer consumers free credit card ratings.

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