Comparing Chapter 13 to Credit Counseling

Credit Counseling and bankruptcy are both ways to relieve the stress of debt. However, they are very different and it is important to understand both before making a decision as to which is best for you.

A Summary of Credible Credit Counseling

Credit counseling is a program designed to help those who are in a state of debt and cannot find a solution to their debt problems. A credible credit counseling company offers services that will allow you to work with a certified credit counselor to devise a plan that is tailored to your specific needs and goals. They will help to educate you about how to avoid financial problems in the future by offering debt management classes or seminars. They do not erase your debt. Instead they work with you to budget money so that you can pay off the debt, often times by debt consolidation.

A Summary of Chapter 13 Bankruptcy

Not everyone is eligible for a Chapter 13 bankruptcy. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A "secured debt" is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.

Bankruptcy will completely clear your debt and you will no longer be hassled by collection agencies and their attorneys. When filing Chapter 13 bankruptcy you are able to keep property that is mortgaged such as your house or car and are expected to repay debts in three to five years.

It is important to keep in mind that the words "Managed by Credit Counseling Company" will appear under each account on your credit report that is involved in Debt Management Program. This is industry code-speak for "High Credit Risk." However, some people feel much better about themselves when they can pay off their debt and become educated about how to stay out of debt rather than filing bankruptcy.

So which one is better than the other?

Here are some comparisons:

• With a Chapter 13 bankruptcy you would typically be dealing with an attorney who will prepare everything and make sure it is correct. What happens if they make a major mistake or file the bankruptcy incorrectly? An attorney has a professional standard to uphold and answers to their State Bar Association. A consumer has plenty of recourse to complain about a bad attorney. There is a possibility of an attorney losing his or her license if the Bar Association so chooses, although that would be
extreme.

• Credit counseling is more or less a “gentlemen’s agreement” to repay a portion of the debt owed over the course of a specified timeframe. What happens if one of the creditors decides to back out of the arrangement at a later point and sue for the past due amount instead? What if all creditors except one agree to the terms? If any of these things happen it could send the consumer back to square one.

• Most mortgage programs treat Chapter 13 bankruptcy and credit counseling as the same thing. Many people want to avoid the stigma of bankruptcy, but in the eyes of lenders the two things are the same. They both deal with paying off problem debts and getting back on track financially.

• Not all credit counseling agencies are alike. The most important thing to do is for a consumer to make sure the agency is accredited. Many non-profit counseling agencies are just starting out and have no idea what they’re doing. In some cases they are doing more damage than good. In other cases they are just plain ripping people off. Be careful and find a credible credit counseling agency.

Disclaimer: The information provided in this site is not legal advice. All information is general information, some of which pertains to legal issues involved in the subject matter. Credit Matters Inc. is not a law firm and is not a substitute for an attorney or law firm. Your access to and use of this site is subject to additional terms and conditions.

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