Written By Ellise Walsh

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.

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 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.

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.

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%.

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.

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.