Bankruptcy or Credit Counseling?
Bankruptcy is considered by many to be a drastic measure to be used as only a last resort. A bankruptcy can stay on your credit report for up to ten years, and will negatively affect your ability to buy a house or a car, your insurance rates and your job prospects. These well known downsides have led many to consider an alternative solution called credit counseling. Credit counseling agencies work with you and your creditors to reduce your interest rates and payments, and to eliminate late fees and other penalties. Typically, repayment plans lasting 2-5 years are established. Sounds like a great way to repay your debts and avoid all the downsides of bankruptcy. Unfortunately, we've found many agencies don't fully explain the downsides of credit counseling. Here are some little know facts about credit counseling:
Myth #1: Credit Counseling won't hurt my credit score
The leading providers of credit scoring systems claim that the fact that you are in credit counseling won't affect your credit score, and this is true. By itself, credit counseling isn't included in the formula they use to calculate your credit score. However, a couple things happen when you enroll in a credit counseling program and these DO severely impact your credit score. First, your creditors may close all your credit card accounts. Second, they may drop your credit limit to zero. Since you still have balances on these cards, you're ratio of credit used to available credit will be horrible. Another factor that will be affected is the length of your credit history. We've seen these things have dramatic effects on credit scores, so to say that credit counseling doesn't affect your credit score is very misleading.
Myth #2: Credit Counseling won't affect my plans to buy a house
We've already found out that credit counseling CAN hurt your credit score, so that in itself will make it hard to obtain home financing. What you probably don't know is that most mortgage providers treat credit counseling like a Chapter 13 bankruptcy. If you're familiar with Chapter 13 bankruptcies, you can see why. Both plans allow you to pay reduced amounts, though bankruptcy is approved by the courts and credit counseling is an arrangement between you, the agency and your creditors. If you are approved for a loan, expect to pay a lot more in interest and fees.
Myth #3: Credit Counseling agencies have my best interest in mind
Most credit counseling agencies are non-profits, which we naturally think of as charitable organizations. Think again. There have been many complaints about credit counseling organizations in recent years. If you choose to enroll in a credit counseling program, you should be concerned about who they're really working for. You'll usually be charged an initial fee plus a monthly fee. But did you know that credit counseling agencies also earn money directly from the credit card companies? Typically, they'll get a percentage of the debt paid each month. Interestingly, we haven't found one agency that clearly discloses this practice. In some cases, the agency is receing more money from your creditors than it is from the fees you pay. Makes you wonder who they're really working for.
Most of this site is geared towards people who have already filed bankruptcy. If you still haven't decided if bankruptcy is right for you, we hope this article has been helpful. Whether you choose to file bankruptcy, enroll in credit counseling or find some other means of getting out of your debt problem, we want you to be informed. Should you choose bankruptcy, you can find a lawyer near you at LegalMatch. If you still want to pursue credit counseling, use a counselor recommend by the National Foundation for Credit Counseling.