Debt Consolidation Company vs. Debt Settlement Company
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Debt Consolidation Company vs. Debt Settlement Company

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 Settlement)

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 extra fees.

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 DS's.

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 balance owed.

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 Store.

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