Be careful with debt repayment plans The Bankruptcy Adviser by Justin Harelik • Bankrate.com

Dear Bankruptcy Adviser,
If I choose credit counseling to pay off my credit cards, will this affect my ability to obtain a home loan? I currently own a home but will be selling soon, and I plan to buy again within the next year. I understand that credit counseling will not hurt my credit rating, but will lenders balk at the fact that my credit report says I am using a credit counselor?
-- Eric

Dear Eric,
Talking to someone about your credit problems is great. Counseling -- talk -- will not hurt your credit score, but actions taken by credit counseling agencies can, if you're not careful. Many of my clients have reported that their credit dropped rapidly after enrolling in credit counseling and agreeing to a debt repayment plan. Further, credit counseling is noted on the credit report, and while it may not directly affect your score, it's there for every lender to see, and will tend to make lenders shy away from you.

One of the chief problems with credit counseling is that these counselors don't work for you. They get financial support from the creditors, and they conduct their business accordingly. For example, suppose you complete the first part of your credit counseling plan, but then miss a payment. This allows the creditor to start collecting from you as if you hadn't done any credit counseling at all. In fact, many clients I have worked with (who missed a payment) have stated that the credit counselor actually gave the creditor the client's work and home numbers!

Eric, I was a loan officer for one of the largest banks in the United States, and I cannot recall us ever lending money to someone in credit counseling. After all, utilizing credit counseling services indicates financial overextension and the inability to pay for existing debt, let alone afford more.

When loan officers consider an application they look at the "Four Cs": credit (current limit), capacity (ability to pay back the loan based on monthly income), character (credit history) and collateral. Anyone in credit counseling receives negative marks for credit, capacity and character.

It's time to investigate other options, Eric. Perhaps you can refinance your home. Perhaps you can sell your existing home for more than the purchase price of your new home. Either would let you take out some cash and pay off your credit cards. As well, a Chapter 13 bankruptcy plan might erase your credit debt and protect your equity.

Whatever you decide to do, don't kid yourself. Credit counseling can keep the creditors at bay and help you avoid lawsuits, but it will not improve your credit score. It will also make home mortgages extremely difficult to obtain.

Justin Harelik is a practicing bankruptcy lawyer in the Los Angeles office of Price Law Group. To ask a question of the Bankruptcy Adviser go to the "Ask the Experts" page, and select "bankruptcy" as the topic.