Compared for me

What is the difference between debt settlement, debt management, credit counseling, and bankruptcy?

We all know that debt is money you owe.  But what about all these other words and phrases we hear that have to do with debt?  What do they mean, and how can the different services out there potentially help you pay off your debt?  In this section, ComparedForMe.com explores the difference between debt settlement, debt management, credit counseling, and bankruptcy.

What is Debt Settlement?

Debt settlement is a process through which you the consumer (the debtor) and the creditor agree on a reduced balance that is considered to be a payment in full.  Debt Settlement does not mean you receive a loan to pay off what you owe.  If you are currently making your minimum payment on your credit card, creditors will not renegotiate a lower balance.  Debt Settlement comes into play as an option when you stop making your minimum payments on a monthly basis.

There are 3 ways to go through the process of debt settlement.  First, the consumer can negotiate with creditors directly.  Second, they can hire a lawyer to negotiate with creditors. Third, consumers can work with a debt settlement agency that negotiates a lowered balance on their behalf.

What is Debt Management?

To go through the process of debt management help, you take the first step of signing up with a credit counseling agency.  This agency then takes a close look at your finances.  Their goal is to set you up on a repayment plan that will pay off your bills in anywhere from three to five years, depending on how much money you owe. 

How do credit counseling agencies work?

These credit and debt counseling agencies have set up agreements with credit card companies that ultimately lower your overall interest rates as a consumer.  It is crucial to pick a credit counseling agency that has a good reputation.  Be sure to verify that the agency is a member of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.  Verifying their membership will ensure that you are giving your personal financial information to a credible company that has proven success with previous consumers. 

When should I consider debt management?

You should consider speaking to a credit counseling agency about debt management if you find yourself in the following situation.  You see that you have fallen behind on your credit card payments and think to yourself, “Man…I could get out of this if my credit card interest rates were reduced!”  As a consumer who is looking to pay off debt, you are basically letting the credit counseling agencies negotiate the lower interest rates that lead to lower payments.  Once this has been achieved on their end, the next step is to set up a monthly payment system that is sent directly to the credit counseling agency you are working with.  They essentially become your new debt collector, as they have taken over communication with the credit card companies on your behalf.

What is Bankruptcy?

When a person declares bankruptcy, he or she is essentially legally declaring they can no longer make payments to their creditors.  A “Chapter 7” bankruptcy can be filed by individual consumers or businesses, and typically lasts three to six months.  Upon declaring bankruptcy, some of your property may be sold to pay off your debt.