Financial Resource

Very often, when you are struggling with debts there seems to be no way out except bankruptcy.  If you are considering a personal bankruptcy, you might want to consider credit counseling as a last step before filing.

Credit counseling can come in many forms.  It can include debt management, debt settlement or just general counseling about budgeting and help creating a plan to get out of debt.

Because there are so many free resources out there for help with budgeting, it is generally best to avoid credit counseling unless you are going to take advantage of debt management or settlement services.  Although whether you are in credit counseling or not does not factor into your credit score, it is reported to your credit.  This can make lenders very hesitant to lend you money for many years to come.  I have worked with numerous lenders who actually prefer to see a discharged bankruptcy than credit counseling!

Credit counseling should only be considered if you are behind on your bills with no foreseeable way to get caught up. It can be a better decision both emotionally and financially than filing bankruptcy.

How can credit counseling help?  Let’s look at two main services.

Debt Management

If you enter into a debt management plan, your credit counselor will negotiate directly with your creditors to lower your interest rates and possibly your payments.  You will then begin making a single payment to the credit counseling service each month.  They will in turn send a payment to each of your creditors.

Because your interest rates are often reduced dramatically, you should be able to begin making progress towards eliminating your debts while in a debt management plan.  Although creditors will report that accounts are in credit counseling, many will begin reporting the payment as current.  This can help prevent further damage to your credit score.

You should expect to pay a one-time set up fee plus a monthly fee for this service.

Debt Settlement

Debt settlement is quite different than debt management.  In debt management, while your lender does reduce interest rates and fees, you will be paying the entire principal balance that you owe.  With debt settlement, you will be negotiating with creditors for them to reduce the balance somewhere between 40% and 60% of what you owe.

Why would they do this?  Because something is better than nothing!  The only time creditors will consider debt settlement is if you are seriously behind on the account and they are afraid that you might file bankruptcy.

Although it will reflect a zero balance, there will be a notation that the account was settled for less than the full balance.

While credit counseling, debt management and debt settlement can have there benefits, it is important to consider your situation and make sure that they are the best option for you.  If you decide that it is, make sure you take the time to select a company to work with carefully!  It is always a good idea to get a referral from someone you trust!

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