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Credit Counseling or Bankruptcy: Which Way to Turn

When looking into credit counseling very the bankruptcy conundrum, the biggest concern is usually saving/repairing one’s credit score (FICO). Well, in order to make an intelligent choice let’s first look at the provisions of each.

The big “sell” of credit counseling is that you are offered the opportunity to avoid bankruptcy and start building a more positive credit profile. Credit counseling offers to have your debts paid within three to five years. Interest rates and late fees on transactions can be lowered. It is conceivable that your repayments could be cut up to 50%. If you are involved with credit counselors, they purportedly have the power to make sure collection phone calls/letters will cease and desist. The advertised end result of credit counseling is a debt free lifestyle with credit scores intact.

If the bankruptcy route is chosen, Chapter 7 filings usually remove debts within approximately four months. If debts are discharged, obviously late fees and high interest rates are gone!! Payments, likewise, would not be reduced but totally eliminated. Chapter 7 filings come with automatic stays which mean collection letters/calls must stop immediately. Bankruptcy filings can be a path toward rebuilding one’s credit profile within reasonable time constraints and for a reasonable amount of money.

Still confused? Do both paths sound plausible? Doable? Realistic? Let’s look a little then, starting with that all important credit score. Credit counselors proffer the viewpoint that counseling plans are a faster route for repairing credit and are, therefore, better than bankruptcy. Why? Bankruptcy filings are reported to credit agencies for ten years. But wait! This does NOT mean you cannot qualify for credit for ten years. Remember, with bankruptcy filings a significant portion of your debt can be discharged which automatically and immediately changes your income to debt ratio. This improved FICO score can continue to grow/improve each year. This will not be the case with credit counseling. Remember earlier in this article it was stated that credit counseling can clear up your financial situation in 3-5 years. You need to understand that during the 3-5 years you are engaged in the credit counseling plan, your credit score is NOT improving at all; as a matter of fact it could remain the same or get worse. You are also being forced to repay at least 50% of your debt, whereas this amount, if not more, may be automatically discharged with a bankruptcy, leaving you much more liquid! With credit counseling, delinquency statuses continue to be reported for at least 3 years. So between 3 years of a counseling plan and 3 more years of reported delinquencies, you could very well be in anything but an advantageous position for maybe 6-8 years! If you file for bankruptcy you could conceivably be spending 6-8 years making significant gains for your credit worthiness on a yearly basis.

Finally, you should be aware that credit companies are not bound to accept the offers of credit counseling agencies regarding repayments. If all involved debtors are not on board you need to understand you could simultaneously be repaying reduced debts, full debts, and maybe even responding to lawsuits filed by those creditors who are not amenable to counseling offers period! Go into non-refundable credit counseling with your eyes wide open. Let a professional lay out the numbers for you side by side. Bankruptcy is not a death sentence; it could very well be sentence to a new and positive life affirming event.

Client Reviews
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