Credit Counseling: Damaging as Bankruptcy?

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? -- Clint

Dear Clint, 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.


  • You wipe out all of your unsecured debts. These include credit cards, personal loans and medical bills.
  • Generally, you can keep your home and cars.
  • You start to rebuild credit after your case is closed, usually six to eight months after you file.
  • You can qualify for home loans two to three years after filing.
  • It will release a lot of financial pressure on your budget.


  • The bankruptcy notation is on your credit report for the next 10 years.
  • You may suffer feelings that you have done something wrong, immoral or unethical.
  • In the future, you will be denied credit or charged higher interest rates.
  • It could hurt job searches if a potential employer reviews your credit.

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.


  • You don't file bankruptcy.
  • You consolidate your bills into one monthly payment, for a period that lasts usually three to five years.
  • Your credit score should stay the same as when you enroll. (I have heard mixed reports on this, so confirm this information with the counseling agency.)
  • You're forced to follow a stringent monthly budget and live within your means.


  • It often doesn't work. According to Gail Cunningham, vice president of public relations for the NFCC, 53% of consumers who enter a formal debt management program either complete it or notify the counselor that they are financially stable enough to resume paying their bills independently. That means 47% drop out. But that's just the ones who go into debt management. A recent survey by Cambridge Credit Counseling, in Agawam, Mass., found that only 1 in 5 of its inquiries actually resulted in debt management enrollment.
  • Lenders still consider you a credit risk. As you have discovered, the fact that you are in credit counseling has shown up on your credit report. Most lenders will not lend to you until your counseling period ends and you have re-established some credit. That is usually about four to six years after starting the program.
  • Similar to bankruptcy, credit counseling may impact how potential employers view you.
  • You might not be able to consolidate all creditors. In that case, you would pay some creditors through the counseling agency and others directly.

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.

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