If you are overwhelmed with debt, but want to avoid bankruptcy, you have a few options you can try. One of these is credit counseling, in which you work with a credit counselor to set up a repayment plan to get out of debt and learn how to better manage your finances.
This is different from the credit counseling required before filing bankruptcy. Also, although it does involve negotiating with your creditors, do not confuse it with debt negotiation, in which companies negotiate a reduced settlement with your credit card companies.
How Does Credit Counseling Work
Credit counseling will, ideally, help you work your way out of debt and give you the tools to successfully manage your finances in the future. In your initial counseling session, your counselor will analyze your financial situation, including:
- Your income
- Your necessary living expenses
- Your current debt
- How your income compares to your monthly expenses
Based on this information, the counselor will discuss your options with you and help you create an appropriate plan, including setting up a realistic budget. In general, part of your plan will include setting up low-interest repayment plans with your creditors and possibly having a portion of your debt forgiven.
Your counselor will also work with your creditors on your behalf to get them on board with the plan.
Advantage of Credit Counseling
The biggest advantage may be avoiding bankruptcy and the effect it has on your credit score and future ability to obtain financing. In addition, credit counseling doesn’t just help you get out of debt; it teaches you how to handle your finances effectively. As a result, you will be better equipped to avoid falling back into debt.
Disadvantages of Credit Counseling
Sometimes, credit counseling just doesn’t work. You may be too far into debt, or have too little income, for a debt management plan to succeed. Even when initially successful, the dropout rate from debt-management programs averages nearly 50%.
Some other disadvantages include:
- Unlike filing bankruptcy, getting credit counseling does not protect you from creditors’ calls. Even if your creditors are working with your counselor, they can still call you seeking full payment.
- Participation is completely voluntary for your creditors. Counseling agencies can’t force them to participate, and some may refuse.
- You may find yourself on a miserly budget. Your creditors don’t care what you can afford. They only care what they can get you to agree to. As a result, you could end up with such a tight budget that even the smallest unexpected expense leaves you vulnerable to defaulting on the whole agreement.
Despite the potential pitfalls, credit counseling can and does work for many people. However, you need to be realistic about what it can accomplish and how quickly. You also need to be sure the budget you agree to is realistic and sustainable.
To increase your chances of success, make sure you work with a reputable counselor. The National Foundation for Credit Counseling is a good place to start to find a certified counselor. You may also want to consult with a bankruptcy attorney before committing to any course of action. Credit counselors, even legitimate one, are predisposed to avoiding bankruptcy, even if that might be your best option.