Search for “debt assistance” or “get out of debt” online and you’ll inevitably come across mentionings of “debt relief” and “credit repair”.
This isn’t surprising in a country where most people are in some kind of debt, and then there’s the power of search engine optimization. However, the over-optimization of debt-related content does further obscure the already confusing debt terms.
Below we’ll discuss the difference between debt relief and credit repair by understanding how debt settlement companies and credit repair specialists differ from one another.
Are There Any Similarities Between Debt Relief and Credit Repair?
Debt relief companies and credit repair (also known as credit counseling) organizations seem similar at first glance, but you’ll learn the differences once we dive deeper into how each one operates.
Three things that overlap between debt relief and credit repair are education, length of working relationship, and legitimacy.
If you’re in debt and in paralysis about what to do about it, both credit repair and debt relief organizations will take the time to learn about your situation and educate you about the options you have available. The one you choose will also be by your side for quite a while. Credit counseling services will maintain a relationship to ensure you’re on a solid track, while debt relief companies advertise their settlement process taking anywhere from two to four years to help you resolve debt.
There’s the fact that both types of operations are legitimate (note: this doesn’t mean all companies are valid, just that the processes of debt relief and credit repair are). In fact, searching for reviews of one national company, Freedom Debt Relief, brings up an FAQ page that discusses legitimacy and that reputable providers are accredited with the American Fair Credit Council (AFCC).
How Debt Relief and Credit Repair Differ
Among the many differences between credit repair and debt relief, it’s important to understand that debt relief companies are for-profit and credit repair/credit counseling organizations are non-profit. This isn’t to say that credit repair and counseling are always free, but the fees they charge are usually nominal and monthly.
Lowering Your Debt Principal (versus Monthly Payments and Interest)
Credit repair and counseling organizations negotiate with your creditors to agree on lower payment plans or reduced interest rates. This is part of the debt management plans (DMPs) they offer and are a huge help for debtors with the wherewithal but not the organization to make headway on their balances.
However, when credit card debt has already spiraled out of control, more drastic measures are usually needed. Working with a debt relief company means having a professional team of negotiators working to lower your debt. There’s no guarantee that debt settlement will work, but when it does, you’re able to resolve your debt at a reduced balance.
Protection from Creditors
Per the Consumer Financial Protection Bureau (CFPB), when they do this, they also get the creditor to agree not to pursue collection efforts or charge late fees while the debtor is on the payment plan.
As mentioned above, both debt relief and credit repair provide personal finance education to anyone. However, credit counseling services will limit their advice to budgeting and repayments. Debt settlement companies, however, usually advise for debtors to stop making payments. Instead of paying their creditor, the debtor saves money in a separate account to eventually make a lump-sum offer on a negotiated settlement.
Because credit counseling services don’t actually reduce any principal debt, there aren’t any tax obligations. On the other hand, if you undergo debt settlement and are successful getting your debt settled for at least $600 or more, you’ll have to file Form 1099-C, which means you’ll likely pay a forgiveness tax on it.
If you’re looking for help with your debt, know that debt relief companies provide actual relief while credit repair and counseling specialists focus on, well, helping you repair your credit and getting back on track financially. Both routes can be beneficial. It’s just a matter of what your situation needs.
Great job in explaining the difference of the both, most people taking this is a misunderstanding, but with your well-detailed post this will stop the minor issue.