Credit counseling vs. bankruptcy
Dear Debt Adviser,
How do you know what it the best solution to credit
card debt? I am hearing bad things about bankruptcy and about credit
counseling. We don't know which end is up? Help!!
The short answer is to stop charging right now! I do not know from
your letter how much credit card debt you have, or your current
income. Therefore, I do not know for sure if bankruptcy, credit
counseling or something altogether different would work best for
you to solve your current problem. We can, however, go over some
options that may help you decide how best to address your credit
To begin with, before you consider any options, you
need to know where you stand. This means you need to know:
- How much income you have coming in each month;
- What your expenses are; and
- What your financial plans include for the short
term (the next five years) and the long term.
These are basic questions that underpin most
financial decisions, but ones which few people take the time to
answer before plunging ahead. Now for the real work! Take a hard
look at your spending and determine in what areas you can reduce
expenses. Keep in mind that the sacrifices you make now will not
last forever. Once your bills are paid, you can begin to spend money
on cappuccinos or cable television again.
Option 1: Pay off your debt
Let's start with an option you did not mention. It's my favorite
for a number of reasons, including cost and self-reliance. It may
be possible for you to pay down your credit card debt yourself.
Begin by completing the exercise above to determine
where you stand. Put the money you save by reducing expenses or
maximizing income toward paying off your debt beginning with the
account with the highest interest rate. Communicate with your creditors
to let them know you are concerned about and committed to paying
off your balances and request that your interest rates be lowered.
The response from your creditors will be more favorable if your
account is in good standing (no late payments) than if you have
30- to 60-day late payments. But it is only a phone call, and is
worth the effort. In addition, some creditors offer hardship programs
for persons who are having trouble making payments. As always, if
you get an answer you don't like, ask to speak to a supervisor.
Keep track of the phone conversations; to whom you
spoke, the agreement that was reached, etc. Get all concessions
in interest charges, late fees or balance limits in writing.
Option 2: Credit counseling
A reputable credit counseling organization can offer you budgeting
and debt management services and money management education. After
meeting with a certified credit counselor, who will evaluate your
current financial situation, you will be advised of your options.
Your counselor most likely will recommend one of the following three
things: Paying off the debt yourself; a debt management plan; or
you will be referred to an outside agency or attorney for further
A debt management plan is a customized plan to pay
off your debt in one to five years. The credit counseling agency
works with your creditors on your behalf to have your interest rates
lowered and fees reduced or eliminated. Creditors are often more
willing to reduce interest rates and make other concessions when
a consumer is enrolled in a debt management plan because it is a
structured plan developed by an experienced credit counselor. On
the plan, you would make one agreed upon payment to the credit counseling
agency, which then pays your creditors.
To avoid any of the bad things you may have heard
about credit counseling make sure you choose a nonprofit agency
that spends at least 60 minutes discussing your situation and discloses
to you all fees and payments required of you before you sign an
agreement. Insist on getting a spending plan or budget as part of
the process. Any agency that will not provide such a plan is not
interested in you; it is interested only in fees. Don't do business
with them, they can complicate your life more than you can imagine!
Option 3: Bankruptcy
I placed this option last because you will want to explore all other
options before choosing bankruptcy. A Chapter 7 personal bankruptcy
remains on your credit report for 10 years and can make it more
expensive for you to obtain credit, insurance, security clearances,
some licenses, gain employment or even rent an apartment. In our
society, credit is becoming an increasingly pervasive feature of
daily life and opportunity. To damage it unwittingly can cause heartache
for years to come.
You sound like a take-care-of-yourself adult. Having
to declare bankruptcy can also be seen as a real failure to make
it on your own. Still, it may be your only option, without which
you wouldn't have the chance to start over. All in all, it's an
action you want to pursue only with your eyes open wide and with
competent counsel advising you.
I hope I have given you enough information to
begin researching for yourself the best way to pay down your credit
card debt. Whichever option you choose, stop charging today! Good
The Debt Adviser, Steve Bucci,
is the president of Consumer Credit Counseling Service of Southern
New England. Visit CCCS
for additional debt
advice or click
here to ask a debt question.