Published August 16, 2011
Dear Bankruptcy Adviser,
I recently went through a divorce and was unable to pay my credit cards. I went to a credit counseling agency for assistance. They were able to lower my interest rates and lower my monthly payments. I am now able to make the payments. When I have applied for credit, the lenders tell me credit counseling is equivalent to filing bankruptcy. Is this correct? If so, wouldn't it be better to file bankruptcy and not have to make the payments?
Nearly every consultation produces this question. I believe most lenders hold the opinions you've faced. As to which is better for your credit, a Chapter 7 bankruptcy or credit counseling, here are some of the more significant pros and cons of each.
Chapter 7 bankruptcy. This is designed for debtors unable to pay their existing debts. Chapter 7 eliminates many existing debts.
Credit counseling. Credit counseling is an alternative to bankruptcy. With credit counseling, you make a monthly payment to one company, which in turn pays your creditors. Credit counseling agencies are nonprofit organizations, and you can find one near you on the websites of the National Foundation for Credit Counseling, or NFCC, and the Association of Independent Consumer Credit Counseling Agencies, or AICCCA.
I would be a strong proponent of credit counseling if the completion rate was higher and you could pay all your creditors with the one monthly payment. That said, I would also be a stronger proponent of bankruptcy if people didn't often feel as if they failed themselves or their families. Regardless, being in financial distress requires you to take a proactive approach to solve the problem. As you can see, neither option is either all good or all bad.