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The difference between credit counseling and debt settlement

New Hampshire residents who are in debt may look to credit counseling companies or debt settlement agencies to help them work through what they owe. The two appear to be similar, but the way that they work to achieve the goal of getting someone out of debt is different. This may be an important difference depending on someone's circumstances.

Credit counseling companies are generally non-profit agencies, although they may charge someone for their assistance. This is usually in the form of fees that are attached to monthly payments passed on to creditors. Counseling companies normally work to reduce people's monthly payments to creditors, and this is often done through the reduction of interest rates or an extension of a payment period.

Debt agencies focus on paying off creditors in a lump sum, often for an amount that is less than what someone owes. It is not uncommon for these companies to suggest that people stop paying their creditors on a monthly basis in an effort to arrange for a single payment to eliminate what someone owes. Fees are normally added to lump sum payment amounts to pay for these services.

In the event that negotiations with a creditor fail or someone is not able to pay back what they owe, bankruptcy may allow them to get out of debt. It is important to note that there are different types of bankruptcy, and that bankruptcy does not cover all debt. A lawyer may be able to explain to individuals how the process works, what they can expect and assist them with filing for bankruptcy.

Source: Consumer Financial Protection Bureau, "What's the difference between a credit counselor and a debt settlement company?", January 03, 2015

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