Dealing With Too Much Debt? Is Credit Counseling a Better Choice for You Than Bankruptcy?

Submitted by Rachel R on Thu, 12/31/2015 - 9:05am

Dealing With Too Much Debt? Is Credit Counseling a Better Choice for You Than Bankruptcy?

In trouble with credit? You have options!

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For consumers deep in debt, there are several different options to remedy the situation. Negotiating directly with your creditors may work for some people – depending on your payment history, and how far behind you are on installments, creditors may work with you. Credit counseling agencies essentially do the same thing and negotiate on your behalf. In some cases, they may have success and in other cases, not.

Does credit counseling work?

Some of the criticism of the credit counseling industry is that they don’t make statistics available as to their success and failure rates. Only one firm offers annual reports of their success rates (Cambridge Credit), and their findings are a mixed bag. Roughly 22% of those who contact the firm sign on for a plan. Their credit program was able to get interest rates cut by more than 55% on average which resulted in an average $142 reduction in monthly payments. Around 43% of those that started plans completed them.

However, if the credit counseling program itself charges fees – which many do – these may offset some of the impact of the lowered payments. Plus, because you make payments to the credit counseling agency that then distributes payments to your creditors, they advise you (and require you in most cases) to stop making payments to your creditors. This results in a hit to your credit score plus a notation in your file that you’re in a credit counseling arrangement that can also hurt your score.

How does credit counseling differ from bankruptcy?

As with credit counseling debt repayment plans, you will have a credit score dip because of either Chapter 7 or Chapter 13 bankruptcy, whichever you choose. With Chapter 7, though, rather than making years of payments on your debt and continuing to struggle, your credit card debts, medical bills, and other unsecured obligations will be wiped out, and you can then get your budget under control and get a fresh start with your finances.

Chapter 13 is more similar to a credit counseling plan because it also repays your debts over time. However, with a Chapter 13, the only debts you will typically pay in full are your secured debts. So if you’re behind on car payments or your mortgage, the repayment plan will allow you to catch up. The plan will usually also pay a little towards unsecured debts like credit cards, medical bills, and some older income taxes – but the remaining balances on these are usually discharged at the end of your plan.

Chapter 13 also may allow you to reduce some interest – you can usually wipe out a second mortgage on your home if there is no equity to support it – and you may be able to get a lower interest rate on your auto loan and possibly a reduced principal balance. With Chapter 7, as opposed to a credit counseling plan or Chapter 13, you can immediately begin to rebuild your credit score and get to work on your financial future within just a few months of your bankruptcy discharge being issued.

Find out more about North Carolina bankruptcy today

If you’re deep in debt and are considering trying credit counseling, talk to a bankruptcy attorney first to find out whether Chapter 7 or Chapter 13 bankruptcy may be better for your financial future than a credit counseling plan. If you live in NC, contact the law offices of John T. Orcutt for a free North Carolina bankruptcy consultation. Call +1-919-646-2654 for a free NC bankruptcy consultation at one of our offices in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington. Call today for a brighter financial future tomorrow.

 

Resources:

Cambridge Credit Counseling Report

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