How Debt Advice is Different from Debt Relief

As of June 2009, U.S. consumer debt stood at a shocking $2.52 trillion, according to the Federal Reserve.

With so many people drowning in debt, it should come as no surprise that many consumers are looking for ways to ease their financial woes.

There are several methods utilized to assist individuals struggling with mounting debt. Most of these methods fall under one of two categories: debt advice or debt relief. While the target clients for these two categories might look the same, the types of services provided by each category’s methods are very different.

What is Debt Advice

Debt advice often comes in the form of credit counseling. When working with a credit counseling service, a certified consumer credit counselor will review a client’s financial circumstances in detail. With this information, the credit counselor will advise the client of ways in which he or she can become and stay debt-free.

The types of services offered by credit counseling include money and credit management education; confidential budget, credit and debt counseling; bankruptcy counseling and education; mortgage delinquency counseling; and homebuyer education.

When reviewing a client’s finances, the credit counselor should take the time to really dig into the client’s budgetary troubles to find the root cause as well as offer solutions. Actions the credit counselor should employ include:

• Obtaining and verifying the client’s personal information and all income amounts;
• Reviewing the client’s budget and discussing spending recommendations;
• Determining if the client’s income can cover his or her essential monthly expenses;
• Reviewing the client’s assets and liabilities;
• Obtaining the client’s debt account statements;
• Reviewing the client’s options based on his or her individual financial circumstances; and
• Creating an appropriate action plan.

Additionally, a credit counselor often works directly with a client’s creditors in order to negotiate better interest rates on existing debts as well as possible reductions in the debt amounts.

If a client’s circumstances are considered dire enough, the credit counselor might recommend a debt management plan, through which the credit counselor oversees monthly payments to the client’s multiple creditors while the client pays the credit counselor directly to cover these creditor payments.

What is Debt Relief

While the primary focus of credit counseling is on providing debt advice to clients, the various debt relief methods focus on significantly reducing a client’s actual debt.

There are three primary types of debt relief: consolidation, negotiation and settlement, and bankruptcy.

Debt Consolidation

The primary method used to consolidate debt is a consolidation loan. There are three ways in which to consolidate debt with a consolidation loan: refinancing your home with a cash-out option, securing a home equity loan or obtaining a personal consolidation loan. With these options, the consumer is obtaining a new loan, often with a low interest rate, with which to pay off existing debts.

Debt Negotiation and Settlement

Debt negotiation, also known as debt arbitration, and settlement is an aggressive approach with the goal to reduce a client’s overall unsecured debt. With this method, a debt arbitrator works on behalf of the client to negotiate lower debt amounts with a client’s creditors, sometimes by as much as 50 percent. While a client will still need to make payments on the remaining debt following debt negotiation and settlement, the process will leave a negative mark on the individual’s credit report.

Bankruptcy

Bankruptcy is the process by which an individual’s debts are canceled through an order of the court. One of the benefits of filing for bankruptcy is creditors must stop any attempts to collect on their debts, at least temporarily. While bankruptcy can feel like a “fresh start” for someone deeply in debt, this step should not be taken lightly – a bankruptcy will stay on your credit report for seven to 10 years. Additionally, some debts, such as student loans and back taxes, cannot be canceled through bankruptcy.