Getting Through Your Divorce and on With Your Life

Credit Counseling Vs. Bankruptcy: 3 Things To Consider

3 June 2015

Celina Henry

If you owe thousands of dollars to credit card companies and are tired of being in debt, there are several different options you could use to help you eliminate the debt. Of these options, credit counseling and bankruptcy are two of the most common types. Here are three things to consider if you are trying to choose which one of these options to use.

Time Frame

The first thing to consider is how fast you would like to become debt-free. Credit counseling often involves debt management programs, and these programs can last for around 48 months, while bankruptcy can be almost instant.

When using a debt management program, you will work with a third-party during this time frame. The third party will negotiate a repayment plan with all your creditors, and you will have to make one monthly payment to the third party. The third party accepts your payment and uses the money to pay off your creditors.

If you can qualify for Chapter 7 bankruptcy, you will have relief as soon as you file. While the entire Chapter 7 bankruptcy process takes time, you will be able to stop making your credit card payments as soon as you file. In about one year, the bankruptcy case will close, and your debts will be discharged. If you want instant relief to your debt problems, bankruptcy is the better option.

Effects on Credit

The second thing to consider is the effects each option will have on your credit. When you file for bankruptcy, it will be listed on your credit report as a derogatory event. A Chapter 7 bankruptcy will remain on your credit for 10 years, but this doesn't mean that you will not be able to improve your credit during this time.

In fact, within a few years of filing, you might be able to qualify for a loan. Some lenders will only hold a bankruptcy against a person for a couple years, even though the event will stay on the person's credit report for a long time.

According to My FICO, late payments on your credit report will stay there for seven years. During a credit counseling program, it is not unusual for late payments to occur. This is often because it can be hard to work out a good payment arrangement with every creditor, and this often results in late payments. Because of this, during your years in the credit counseling program, you may continuously have late payments appearing on your credit report.

The bottom line is that both options can have negative effects on your credit report, but at least with a bankruptcy you can begin rebuilding your credit as soon as the case is over.

Effects on Lifestyle

The final thing you may want to evaluate is how each option will affect your lifestyle. With both options, you will have to get rid of every credit card you have. Over time, you may be able to get new credit cards, but for a while you will have to learn to live by paying cash.

The difference is that after filing for bankruptcy, you will no longer have any credit card debts to pay. With credit counseling, your payments might last for at least three years, and the monthly payment amount might be really high.

Because of this, it may be a lot easier for you to start over and begin managing your money wisely if you choose to go with bankruptcy instead of credit counseling services.

If you would like to find out if you qualify for Chapter 7 bankruptcy, make an appointment with a bankruptcy attorney today. If you still want more information, you can check it out here. 

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