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Credit Counseling or Bankruptcy? Soon, You May Have No Choice

If you are looking for a quick debt consolidation than you should be alarmed with the ongoing legislation to severely limit the ability to file bankruptcy in cases where people have the ability to pay.

If not bankruptcy then what? The credit counseling ... which pitfalls millions of unfortunate Americans are already facing.

If the pending bankruptcy bill is enacted, the new law would require people to enter into credit counseling programs prior to filing for bankruptcy. This may cause the already huge credit counseling industry to expand even further... and limit your chances for a quick and easy way out of debt.

Critics are arguing about the outcome of this legislation... Some say that credit counseling ignores the root of the problem: insufficient income to manage existing debt. In contrast, Chapter 7 and Chapter 13 bankruptcies are effective because they address the cause of peoplesí financial problems by eliminating or reducing the total amount of debt.

While many criticize this legislation, others think that this would be the right decision. Their argument is that bankruptcy was never designed to be an "alternative to repayment." Bankruptcy should always be a last resort. Debt management plans are designed to be an "alternative to bankruptcy" for those who have some ability to pay.

Well, let's see how do we deal with an overwhelming debt today, when we still have the choice? Unfortunately, millions of people ask this question every year... Today, if you are in financial hot water, you may consider these choices:
- enroll into a debt management plan with a credit counseling agency
- or file for bankruptcy

How do you know which will work best for you? It depends on your amount of debt, your level of discipline, and your plans for the future.

Not all credit counseling agencies are to rob you of your last cash. There are some that won't necessary force you into the debt consolidation program but offer some real counseling first. Then, if you're still unable manage your debt, they'll offer you a program that would be fair and may actually get you out of debt. So having a reputable credit counseling agency in mind, let's compare the options...

Here, Bad Credit Advisor outlines the main differences between a debt management plan (DMP) and bankruptcy:
Credit Counseling DMP
Repay debt - you must repay 100%,
Loose assets - you won't,
Get new loan after - easy when done with DMP (if you can show disciplined timely payments),
Stays on credit report - 7 years,
Fees - Set-up fees and monthly payments,
Creditors calls - May continue,
Duration - An average DMP lasts for 48 months minimum,
Affect FICO score - No (some creditors may report your enrollment but it'll only go as a remark),
Which debt is consolidated - Unsecured only (bills, cards),
Improve bad credit - You may when done with DMP and show timely payments.
Bankruptcy Chapters 7 & 13
Repay Debt - Debt forgiven (Chapter 7), you repay cents on the $ (Chapter 13),
Loose Assets - you may (Chapter 7),
Get new loan after - very difficult and at the highest interest rates,
Stays on credit report - 10 years,
Fees - Attorney's fee,
Creditors calls - Will stop,
Duration - Up to 3.5 months to get Chapter 7 and over 6 months to get Chapter 13,
Affect FICO score - Yes (bankruptcy gets on your credit report under 'Public Records' section),
Which debt is consolidated - Unsecured and secured (including house and car),
Improve bad credit - No, you credit will worsen.

Deciding between a debt management plan versus bankruptcy is difficult because of many factors to consider. When a person in debt, but is making a reasonable income, bankruptcy may not be the option to take.

In any case, one good thing that may come out of this legislation, is that you won't have to make a tough decision... choosing between credit counseling and bankruptcy.

For more information see these resources:
http://www.ftc.gov/bcp/conline/pubs/credit/bbcr.htm
http://www.ftc.gov/bcp/conline/pubs/credit/kneedeep.htm
http://www.cc-bc.com/fact_or_fiction.htm

(the above is only an opinion of bad-credit-advisor.com. Please consult your attorney or accountant when deciding between credit counseling and bankruptcy.)

Submitted by: J. Pikus

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October 2004