Credit Counseling vs. Debt Settlement: Understanding the Key Differences

Fairfax, VA – April 26, 2010
In today’s difficult economy, many people struggle to manage their debt. When looking for help, consumers often feel confused about available options. To address this issue, the U.S. Senate is holding hearings on debt settlement practices.

The Association of Independent Consumer Credit Counseling Agencies (AICCCA) urges consumers to understand the difference between credit counseling and debt settlement before choosing a solution.

Credit Counseling vs. Debt Settlement: The Core Difference

“The biggest difference is repayment,” said Dave Jones, President of AICCCA.
“With credit counseling and a debt management plan, consumers repay their full debt. With debt settlement, they repay only part of what they owe.”

Because these programs work very differently, consumers should review each option carefully.

What Is Credit Counseling?

Most credit counseling agencies operate as nonprofit organizations. They offer a free initial counseling session with a certified counselor.

During this session, the counselor reviews your finances and suggests options based on your goals. These options may include:

• Budgeting guidance to manage debt independently

• A Debt Management Plan (DMP)

• Referrals to other services, such as bankruptcy or family counseling

What Is Debt Settlement?

Debt settlement companies usually operate as for-profit businesses. They negotiate with creditors to reduce the total amount owed.

These companies often charge large upfront fees, which may range from hundreds to thousands of dollars.

Comparing Debt Repayment Options

Fees
State laws regulate fees. Enrollment usually costs less than $75, with monthly fees under $50.

Credit Impact
After 90 days of on-time payments, many creditors update past-due accounts. This can help improve credit history. DMP participation does not affect FICO scores.

Collections
Once payments begin, creditors consider accounts paid as agreed. Collection activity usually stops.

Taxes
Because consumers repay the full debt, no tax liability applies.

Debt Settlement Program

Fees
Fees often range from several hundred to several thousand dollars.

Credit Impact
Payments go to the settlement company, not creditors. During this time, accounts fall further behind. This can severely damage credit scores.

Collections
Collection calls continue, and some creditors may file lawsuits to recover unpaid debt.

Taxes
The IRS treats forgiven debt over $600 as taxable income. Consumers must pay taxes on the forgiven amount.

About AICCCA

Founded in 1993, the Association of Independent Consumer Credit Counseling Agencies (AICCCA) promotes professional and ethical credit counseling services. Its nonprofit members focus on financial education, efficient systems, and modern technology.

AICCCA members counsel millions of consumers each year and advocate for responsible debt solutions.

📞 Contact: (866) 703-TRUST (866-703-8787)
🌐 Website: www.aiccca.org