Credit Counseling vs. Bankruptcy: Which is Right for You?
Managing your finances is certainly hard work, and for many of us, there comes a time when we need expert guidance. To reduce debt, you may consider credit counseling or filing for bankruptcy.
How do you know which route offers the best path for your financial situation?
Let’s review the advantages and disadvantages of each option as well as how to determine the right choice for you.
What is Credit Counseling?
Credit counselors work with you to improve your financial knowledge and money management. A credit counselor will review and analyze your finances to create a plan to reduce debt. You’ll be asked to disclose information about your income, expenses, and debt.
Not all credit counseling programs are reputable, and some can even get you into more debt. If you decide to seek credit counseling, use the Federal Trade Commission website to find a trustworthy program.
There is some overlap between credit counseling and debt management. It’s important to understand the difference between the two programs before choosing one or the other (or both). Debt management programs typically make payments to your creditors on your behalf from the monthly payments you make to them each month.
The idea is that the debt management company works with creditors to lower your interest rates. This can lead to smaller monthly payments, but it’s also something you can do yourself. Some credit counselors may recommend a debt management program to you.
Always ask for information about the fees and terms of these programs before signing up and sharing your personal information.
Advantages and Disadvantages of Bankruptcy and Credit Counseling
In order to review the advantages and disadvantages of bankruptcy and credit counseling, we’ll focus on the most common form of personal bankruptcy: chapter 7.
Chapter 7 bankruptcy is a form of liquidation and allows you discharge a number of debts. It can eliminate unsecured debts such as credit card debt, personal loans, and even medical bills. In most cases, you will be able to retain ownership to your personal property such as your house and car.
Chapter 7 bankruptcy will affect your credit score and stay on your report for 10 years; however, the effect on your credit fades over time.
This form of bankruptcy is a much shorter process than others and generally takes four to six months. The process can be emotionally draining but has the potential to eliminate a great amount of debt. You will be required to complete a credit counseling course before filing and a personal financial management class after filing, but before you receive the discharge.
Credit counseling allows you improve your financial knowledge and reduce debt. However, to reduce your debt, you must find a reputable agency and be willing to invest time in the process.
While you don’t have to file for bankruptcy, your credit score may be affected especially if you choose to work with a debt management company. Your enrollment in credit counseling will appear on your report.
Paying back your debt with credit counseling may take as long as five years, and there are typically no guarantees. If you’re under great financial pressure, this may not be the best route for you. Be sure to consider if your debt is such that you can manage a long-term plan.
In some cases, filing for bankruptcy and enrolling in credit counseling may be looked upon unfavorably by potential employers; however, this is frequently better than having ongoing lawsuits and collections.
As you can see, there are several factors to consider when deciding between bankruptcy and credit counseling. Discover all of your options and make an informed decision by contacting us for bankruptcy counseling and advice.