San Diego, CA - Jim Garnett, a/k/a
Ask MrG, who is a member of the ICFE Board of Advisors and
the Education Coordinator for Consumer Credit of America
a/k/a Consumer Credit of Des Moines explains the
differences between a debt consolidation company and a
debt settlement company.
To have a question answered by Jim, contact him at:
Do not confuse a "debt consolidation company" with a "debt
settlement company". They are not the same. Here are the
differences: (DC = Debt Consolidation, DS = Debt
Balances. DC clients pay off their entire debt in
full. DS clients pay a portion of their debt averaging 50
cents on the dollar, but by the time the debts can be
settled, they may have doubled due to high interest and
Up Front Costs. Many DC's have no upfront costs at
all, while most DS's require a hefty upfront investment
often amounting to $500-$1000 dollars. Monthly fees. DC's
monthly fees are usually significantly less than those of
Creditor Payments. DC creditors are paid from the
very first payment. DS's hold your monthly payments in a
trust account until they have enough to negotiate a
settlement with one of your creditors. Their first payment
to a creditor is often 12 months after your first paying
into the program
Creditor Consent. DC's proceed with the creditors'
full consent to work together with the debtor while a DS
solicits no consent from any of the creditors.
Interest Rates. DC clients see their interest
lowered on most accounts. DS clients see no lowering of
interest rates and may, in fact, see it become higher.
Late/Over Limit Fees. DC clients see these extra
fees stop after 3-4 consecutive monthly payments are made
to the creditors. DS clients continue to experience
late/over limit fees on their accounts.
Re-aging of Accounts. DC clients may have their
delinquent accounts brought to current status after 3-4
monthly payments. DS clients see all their accounts sink
to delinquent status and remain that way.
Possibility of Being Sued. DC's acquire the consent
of the creditor after which law suits are extremely rare.
DS's work without the co-operation of the creditors and
make their clients extremely vulnerable to law suits
attorney and court filing costs can be added to the
Credit Impact. DC clients can experienced a
temporary "ding" on their credit but all accounts
eventually show "Paid in Full". DS clients experience
greater damage to their credit because their accounts will
only show as a "Paid Settlement". Plus, the residue of
numerous judgments from being sued can also leave a
negative trail on their credit reports and public record
for future lenders and/or employers (conducting background
checks) to see.
Tax Liability. DC clients have no extra tax
liability from consolidating their debts. DS clients are
required by Federal Law to pay income tax on any balance
minus the first $600 savings. For example, if you owed
$5,000 on an account and settle it for $2,500, you will
receive a 1099 Miscellaneous Income Form to pay tax on
$1,900 of "phantom" income! The year end tax liability
could be huge since the more you save in settlement, the
more taxes you will pay. Debt Settlement companies often
do not reveal this fact to the consumer. The taxes paid
could eat up much of the money saved in doing settlements.
About the ICFE:
The Institute of Consumer Financial Education (ICFE) was founded in 1982 by
the late Loren Dunton (creator of the Certified Financial Planner (CFP)
designation and founder of the College for Financial Planning in Denver, CO.)
The ICFE is dedicated to helping consumers of all ages to improve their spending
practices, increase savings and use credit more wisely.
The ICFE is an
award winning, nonprofit, consumer education organization that has helped
millions of people through its financial continuing education courses programs
and resources. In addition to eight Certification courses covering identity
theft, credit files, credit repair and credit scoring, among others, it also
publishes the Do-It-Yourself Credit File correction Guide, which is updated
annually. The ICFE has distributed over one million Credit/Debit Card Warning
Labels and Credit/Debit Card Sleeves world wide.
The ICFE is a partner
with the national Jump$tart Coalition for Financial Literacy and the California
Jump$tart chapter. The ICFE staff is also active with San Diego Saves and
Military Saves, both offshoots of America Saves.
The ICFE is also an
on-line help for consumers who spend too much. ICFE's spending help was featured
in PARADE Magazine in the Intelligence Report section. The money helps and tips
are from the ICFE's Money Instruction Book, our course in personal finance.
The ICFE helps consumers and students with mending spending, learning about
the proper use of credit, budget and expense guidelines, how to set up and
implement a spending-plan and also how to access financial education courses and
how to teach children about money. Other ICFE services include: Ask Mr. G
library, a free eNews service, and an online resource center for students,
parents and educators, plus financial education learning tools in the ICFE Book