Best Relief for Credit Card Debt: Credit Counseling or Debt Settlement?

While the United States economy has suffered from the home mortgage crisis, credit card debt has been bubbling up as the next witch's brew ready to bring its own potent poison to the table.

Credit card debt has been getting out of control for years, but the situation has worsened as other forms of credit have dried up. Home equity loans are no longer a ready cash cow for acquisitive Americans, and growing unemployment rates have more people tapping credit cards to the limit.

Credit Counseling and Debt Settlement

It's no wonder, then, that organizations that help consumers resolve credit card debt are extremely busy, serving thousands of new clients. There are two popular approaches to resolving credit card debt issues -- credit counseling and debt settlement.

Each helps clients by educating them in ways to get out of debt and stay that way, but the approaches are significantly different. The objective of credit counseling is to pay off debts in full by negotiating lower interest rates, while debt settlement companies pay off debts fast by negotiating reductions in the amounts owed. Here are the main differences.

Credit Counseling:
1. Negotiate reduced interest rate, pay off full original balances
2. Client pays monthly amount to counseling service, which makes payments to creditors
3. Monthly payments usually higher
4. Compensated by fees from lenders, 4-15%
5. Negotiate reduced interest rate, pay off full original balances
6. More BBB complaints
7. 83.9% of BBB complaints resolved
8. 21-26% reported success rate
9. Professional Associations: National Federation for Consumer Counseling (NFCC) and Association of Independent Consumer Credit Counseling Agencies (AICCCA)

Debt Settlement:
1. Negotiate reduced balances, then pay them off in full
2. Client sets up separate savings account, pays own bills from it
3. Monthly payments usually lower
4. Compensated directly by clients, 10-15%
5. Negotiate reduced balances, then pay them off in full
6. Fewer BBB complaints
7. 91.5% of BBB complaints resolved
8. 40-55% reported success rate
9. Professional Association: The Association of Settlement Companies

Different Approaches for Different Problems

But the biggest distinction is that these two approaches are designed to help people with different levels of debt. Consumers with credit card debt less than $7,500 probably should not consider debt settlement. In such cases, credit counseling or a do-it-yourself program would be a better approach.

But people who have amassed very high levels of credit card debt may find debt settlement the best way to clear the deck and get back control of their lives. Debt settlement companies that subscribe to standards of The Association of Settlement Companies (TASC) work toward paying off all balances in 12-36 months.

Debt Settlement Offers Alternative to Bankruptcy

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 all but eliminated personal bankruptcy for most Americans. When this option was effectively taken off the table, the contemporary debt settlement industry took form to meet the needs of consumers with exceptionally high levels of unsecured debt.

Let's be clear about this: debt settlement is not for everyone, but it provides a much needed alternative to bankruptcy for people who, for whatever reason, cannot meet their obligations. People who cannot make even the minimum monthly payments on credit card debts aren't likely to succeed with a credit counseling solution that calls for even higher monthly payments.

Criticism and Comparisons

For an industry with so much to offer the public, debt settlement has been subject to a great deal of criticism lately, primarily for two reasons: 1) the debt settlement industry is relatively new and not well understood; and 2) a few bad companies have sullied the reputations of the majority of legitimate, highly ethical ones. The industry is correcting both problems by establishing a higher public profile to raise awareness and understanding, and by sorting out the bad apples.

The credit counseling industry, led by the NFCC, is not at all reluctant to cast stones at debt settlement, perhaps even questioning the industry's right to exist. But a quick glance at the comparison above should alert readers to several concerns about credit counseling. Two in particular stand out.

First is the matter of who pays credit counseling agencies. Some have observed that they appear to be well-mannered collection agencies for the card companies, because creditors pay fees to them (which is not the case with debt settlement companies).

Then there is the matter of effectiveness. The credit counseling success rate of 21-26% lags well behind the 40-55% reported for debt settlement. If your financial future were on the line, which would you choose?