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.
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:
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.
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.
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:
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.