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Which is worse: credit counseling or bankruptcy?

Mitchell Allen
Profile Picture of Mitchell Allen

Mitchell Allen is the founder and CEO of the Debt Education Certification Foundation, an organization that provides credit counseling certificates and debtor education courses for those who are filing for bankruptcy. He’s also the founder of legal services marketing agency LeadRival. He’s the author of numerous books on debt and bankruptcy.

Mitchell is not an attorney and his answers should not be considered legal advice. Please consult with an attorney about your legal situation. Full Bio


Which is worse: credit counseling or bankruptcy?


Overwhelming debt can make life difficult at best and unmanageable at worst, and many people find that the only way to repair their financial problems is to either file for bankruptcy or consolidate their outstanding debts. Deciding on the right path to take to solvency becomes the next question.

Depending on the particular debt situation, there are six chapters of bankruptcy that can be utilized if the debtor qualifies through bankruptcy court, with four chapters applying primarily to a business. For the individual, credit counseling is also available as an alternative to Chapter 7 or Chapter 13 bankruptcy. The decision on choosing a form of debt relief basically depends on the objective of the process. But, which one is worse?

Credit Counseling

One of the primary disadvantages of retaining a credit counselor is that they do not actually negotiate any reductions in the amount of debt owed. The counseling agency may be able to negotiate a reduction in the amount of a single payment, or a group of payments, but credit counseling agencies do not necessarily provide debt relief or debt restructuring services.

Credit counselors can also suggest methods of structuring personal debt or trimming budgets, such as maintaining a percentage balance of debt to income. Paying bills are important, but it also takes money to live. After all, living through the debt relief process is the ultimate goal. The bottom line is that credit counseling is rarely free and usually does not eliminate debt.

Loan Consolidation

Credit counseling will often lead to consolidation of loans when a lending agency is willing to restructure all debts under one reasonable and affordable loan payment, but sometimes that particular consolidation loan payment can still stretch the personal budget if financial calamities arise. In addition, personal property can still be lost in a debt consolidation, so it is very important to assess the final outcome of any consolidation loan.

Disadvantages Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the best legal action to eliminate debt, and is normally referred to as liquidation. It is usually the best choice for individuals with little personal property that want to legally discharge certain qualified debts in an effort to get a fresh start on their finances. However, discharging all debt is rarely possible, although many debts will qualify for elimination.

Chapter 7 agreements can also result in the filer paying a significant portion of their income on the debts that still must be honored. Chapter 7 bankruptcy can also have a negative impact on individual credit, so it is important to look at the resulting credit rating after coming out of bankruptcy.

Disadvantages of Chapter 13 Bankruptcy

While Chapter 13 bankruptcy may not damage the filer's credit rating as much as a Chapter 7 filing, there are still some disadvantages for those who can qualify. Chapter 13 bankruptcy is usually filed when the filer is attempting to protect personal assets; in particular, private dwellings or small personal businesses. The bankruptcy trustee can also seize and sell personal property in some instances in an effort to repay creditors.

Chapter 13 payment plans often extend for five years, which can also strain the household budget for a significant period of time. Depending on the repayment or income interception amount, the percentage of income allowed for creditors can also become problematic if other financial emergencies occur. While Chapter 13 bankruptcy can be good for protecting assets, it is still a roll of the dice for those with low to medium incomes, because the amount left over from the garnishment can make finances a struggle for the entire repayment period.

After a review of these options, it's plain to see that they are neither all good or all bad. Choosing the right debt restructuring option is very important and should be discussed in depth with an experienced debt relief attorney who understands how to craft a workable bankruptcy filing that protects both the creditor as well as the filer's budget and credit rating.

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