A reader is confused by these similar-sounding terms, but they're very different.
Question: Am I just stupid, or is it really hard to figure out the differences between DEBT RELIEF programs and DEBT SETTLEMENT programs?
Whenever I Google around and think I’ve figured it out, another website seems to say something either a little different or even completely different.
Also, some of those sites just seem to be trying to get me to call them for an explanation. I’m sure they’re trying to sell me something that’s probably a scam. So here’s my question: Can you give me an honest answer in plain English? And can you do it without a hard sell for something I probably don’t need?
— Richard in New Mexico
A reader is confused by these similar-sounding terms, but they are very different.
The problem with getting out of debt is that the names of the programs are sometimes more confusing than the programs themselves. The confusion between “debt relief” and “debt settlement” is an example.
But think of those two terms like you would pizza — I know that sounds weird, but there’s thin-crust and thick-crust. They’re both pizza, but they’re also different — and some people prefer one more than the other.
Sadly, ordering a pizza is easier than getting out of debt. If you mess up your pizza order, you have one bad meal. If you choose the wrong option to get out of debt, you could incur even more debt. The solution is to consult an expert. That’s why there’s Debt.com – to be that objective expert. Call us today.
Howard Dvorkin CPA answers…
Yes, Richard, there’s a difference between debt relief and debt settlement — and no, you’re definitely not stupid.
If anything, the personal finance industry has done a poor job explaining debt solutions in, as you say, “plain English.” Sometimes, the federal government is to blame. Look no further than its myriad of plans to help Americans save on student loans. They come with names like Income-Sensitive Repayment, Income-Based Repayment, and Income-Contingent Repayment.
Thankfully, debt relief and debt settlement are easier to explain. Let’s start at the beginning.
The first thing to know: debt relief is a catch-all name for a slew of specific services. It’s like the word pizza. Once you decide on ordering one, you have to decide the size, thick or thin, and the toppings.
Debt relief covers everything from refinancing your mortgage to, confusingly enough, debt settlement. So debt settlement is really just a debt relief option.
Still, debt settlement isn’t among the most common options. You can read more about all your debt relief options at Debt Relief Programs for Every Type of Debt.
OK, now let’s talk about what debt settlement really is. As you’ll read in the above report, “Debt settlement is the most damaging option for your credit.”
Why? Because you essentially “settle” your debts for less than you owe. Your creditors accept only a portion of what they lent you. That’s why, Richard, you’ve seen all those hard-sell ads for “Solve your debt problems for pennies on the dollar!”
They may not be lying about that, but they aren’t telling you the whole truth, either. When you settle your debts like this, it’s not hard to imagine your creditors aren’t going to trust you with their money again any time soon. You credit score takes a big hit, which makes getting an auto loan or mortgage in the future a pricier proposition.
You wanted an honest answer, Richard, so here it is: Call a nonprofit credit counseling agency before you do anything. A certified credit counselor will give you a free debt analysis, so you can choose the debt relief that will help you most without dragging down your credit score.
Debt.com can introduce you to one of those agencies, but if you don’t call us at the number above, make sure you do this while doing your own research: Look for an agency that has an A-plus rating with the Better Business Bureau, has been around for at least a decade and preferably two, and has excellent ratings on sites like TrustPilot and Consumer Affairs.
If you’re still confused, Richard, you can call Debt.com for a free consultation. You’ll get the facts, with no hype and no hard sell.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.