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Differences between debt management companies

Kentucky residents who are struggling with their financial obligations may wish to learn more about the differences between debt settlement and credit counseling companies. Although the two may seem similar, there are important differences that can influence how negotiations with creditors are handled.

A debt settlement company operates by offering to settle someone's debt with creditors for a fee. Creditors may elect to forgive the debt under some circumstances, and the debt settlement company will normally charge the individual debtor a certain percentage of every dollar that has been forgiven. Unlike credit counselors, debt settlement companies do not necessarily make an agreement with creditors to prevent collection efforts while negotiations are underway. Those who are working with a debt settlement company should thus also take care to continue making payments to their creditors in order to avoid penalties.

Credit counseling companies are often non-profit organizations intended to help consumers manage and reduce their debt. These entities function primarily by negotiating with creditors to either reduce interest rates or increase the time period of the loan in question. In working with a credit counseling company, a client will typically make reduced monthly payments to the counseling company, and the company will in turn make payments to the creditors.

In cases like this, someone struggling with an overwhelming amount of debt may wish to consult their situation with an attorney. Since neither debt settlement or credit counseling companies may be successful in reducing the entirety of a person's obligations, it may be advisable to seek alternative resolutions which can include filing for bankruptcy. An attorney who has experience with these matters can describe the eligibility requirements and other aspects of the process.

Source: Consumer Financial Protection Bureau, "What's the difference between a credit counselor and a debt settlement company?", accessed on 1/11/2015

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