Credit Counseling, Debt Settlement, and Bankruptcy Explained

Nobody wants to get into serious debt, but it happens all the time. We’re assuming you won’t need any of the options explained here, but it won’t hurt to have an idea about how credit counseling, debt settlement, and bankruptcy work.

Credit Counseling

Credit counseling has been available for more than a half century to advise, serve as an intermediary with creditors, lower interest rates, and consolidate monthly bills. Many reputable, nonprofit companies provide these services, but be aware that numerous scam companies have surfaced over the past decade or so. If you get involved with one of the latter, you could end up with even bigger problems than you started with.

If you’re thinking of seeing a credit counselor or counseling firm, it’s important that you keep a few things in mind. For example:

  • Ask what the total monthly fee will be. You should never have to pay more than $50 a month for the services of a credit counselor. Some predatory firms charge as much as 10 percent of their customer’s payments, which ends up totaling a couple hundred dollars a month.
  • Check with your local Better Business Bureau or Consumer Protection Agency to see if any complaints have been filed or any current investigations are underway about the firms you’re considering.
  • Never sign a contract at the first meeting. Be certain you have time to understand the agreement, the repayment schedule, and the fees. Never disclose your bank account number before you have signed a contract.
  • Be wary if a counseling service doesn’t suggest other options besides its own debt management plan. Remember, it might be possible to sell some personal property or refinance your mortgage to lower your debt rather than embarking on a debt management plan.

Lack of affiliation with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies may be a reason to avoid a firm. Such an affiliation doesn’t guarantee you’re getting the best firm, but it does mean the company obtains a majority of its income from grants and donations rather than from fees alone.

And remember, if it sounds too good to be true, it probably is.


Credit card companies have minimum-payment guidelines they use to lower their interest rates, so there’s minimal negotiation for most folks. Beware of the firm that promises to remove your unsecured debt, offers to pay off debts with pennies on the dollar, or guarantees you’ll avoid bankruptcy.

Debt Settlement

Debt settlement companies charge clients a fee to settle debt with a credit card company or other debt collectors. Typically, a debt settlement firm gets a credit card company to agree on a reduced balance that’s considered payment in full and then charges the client for its services. Debt settlement also is known as debt arbitration or debt negotiation.

Although credit counselors typically get creditors to agree they won’t continue to try to collect from a client when the client is in the credit counseling debt management program, debt settlement companies often don’t provide that service. That can result in creditors charging late fees and penalty interest charges as well as continuing to pursue collection.

Seeking the services of a debt settlement company should definitely be a last resort.


Some credit card companies have standard policies for how much debt they’ll forgive. If that’s the case, you’ll do as well negotiating with the company on your own as you would using a debt settlement company.


If you absolutely don’t have enough money to pay what you owe, bankruptcy is a possible option. Achieving bankruptcy can give you a fresh financial start by erasing your debt. However, it definitely is not for everyone.

Even if you qualify for bankruptcy, however, certain types of debt called priority obligations won’t be eliminated. And filing for bankruptcy can have long-lasting financial consequences.


Priority obligations are certain types of debt you’ll still be responsible for when you file for bankruptcy. These can include child or spousal support and certain income taxes.

If you are ever at the point that you’re thinking about filing bankruptcy, consult a bankruptcy attorney who can help you decide if it’s the right move.