When comparing a consolidation service vs debt settlement service, one of the things that many people are confused about is why a settlement service costs more than a consolidation service. More specifically, you may be wondering why you should pay more for one service over another. Shouldn't they cost the same?
In order to truly understand why it is that a consolidation service does not "appear" to charge as much as a settlement company, you must first have at least a basic understanding of what both of these debt relief options entail.
Debt Consolidation/Debt Management: The first thing that you need to understand is that a debt consolidation program (also called a Debt Management Plan or "DMP" for short) does not involve any new loans. Instead, when you enter a DMP a credit counselor will work on your behalf in order to negotiate lower interest rates with your unsecured creditors while at the same time trying to get any penalties or late fees removed from your accounts as well. In addition, your counselor will also try and negotiate new monthly payment amounts that fit your budget. Once this initial process is complete, you will make one "consolidated" payment to your credit counselor each month who will then pay your creditors.
As you can see, this service does not involve a reduction of you debts (except maybe the odd late fee or over-limit fee) but rather aims to help you pay off your debts in full over time.
Debt Settlement/Debt Negotiation: The aim of settlement program on the other hand is to reduce the actual amount of debt that is owed to your unsecured creditors. This is achieved by negotiating one time lump sum payments (that typically amount to 40% to 60% of the outstanding debt) in exchange for dismissing the debts completely.
When a consumer enters into a debt management program, the bulk of the work that is required of the credit counselor happens in the first few weeks of the program. The client's finances are reviewed, a budget is prepared, and the necessary negotiations with creditors takes place. Once this is complete, there is little for the counselor to do besides facilitating the payment of creditors each month for the next 60 months (the typical length of a debt consolidation/management program).
On the other hand, while a debt settlement program requires a bit less work up front (a financial review is completed along with a budget, but little if any creditor contact is made at the start of the program), the ongoing commitment to servicing a client's account is usually much greater. The actual negotiation process typically involves numerous discussions with creditors over a 36 month period (the length of a typical settlement program). And due to the nature of the program, contact with the client also occurs much more frequently. In fact, when comparing a consolidation service vs debt settlement, statistics show that the client/counselor contact is 10 times greater within a settlement plan.
Another reason that settlement programs require more hands on administration is the necessity to "track" the accounts of their clients. You see, unlike in a consolidation program where the original creditor continues to be paid, during a settlement program it is not uncommon for a single debt to be transferred several times between the original creditor, collection agencies and lawyers. This "shifting" or transfer of accounts must be continually tracked by the settlement company leading to increased administrative costs.
To learn more about your different debt relief options including
debt consolidation service vs debt settlement, see this article
Options For Getting Out Of Debt."